TRANSASIA BIO-MEDICAL LTD.,MUMBAI vs. ACIT RANGE - 11(3)(1), MUMBAI

In Ground 1, the assessee has challenged the addition made on account of transfer pricing adjustment.

Briefly, the facts are, the assessee is a resident company engaged in the business of providing equipments and supplies to the diagnostic world. It has eight subsidiaries situated in different parts of the world. As stated by the transfer pricing officer (TPO), in the years 2009 and 2010, the assessee acquired few more companies in diagnostic field. From the transfer pricing study report, the TPO found that during the year under consideration, EM Germany, an associate enterprise (AE) of the assessee had acquired certain companies engaged in the business of diagnostic products to expand its business. He found, for funding such acquisition the assessee had granted loans to EM Germany in USD as well as in Euro. The aggregate amount of loan granted to the AE was to the tune of Rs.27.30 crores. He further found that assessee had charged interest on the loan advanced @3% p.a. and the assessee has received interest from AE of Rs.60,54,098. Not being satisfied with the interest rate applied by the assessee on the loan given, the TPO called upon the assessee to explain why SBI Prime Lending Rate of 11% should not be applied as CUP. Though, the assessee objected to the proposed action of the TPO, however, rejecting the submissions of the assessee, the TPO concluded that SBI Prime Lending Rate of 11% should be applied along with a markup of 3% considering the fact that the loan is unsecured and involves various risks like, country risk, currency risk, administration cost, etc. In simple terms, the TPO applied the CUP rate of interest at 14%, thereby, determining the arm’s length interest at Rs.3,82,13,823/- and proposed the same for adjustment to the interest charged which subsequently was rectified u/s 154 of the Act to Rs.2,23,10,454/-. The adjustment proposed by the TPO was added to the income of the assessee in the assessment order. While considering assessee’s appeal on the issue, learned Commissioner (Appeals) observed that for certain foreign currency loan granted in USD and Euro, Barclays Bank Plc. has charged average rate of interest at LIBOR / EURIBOR at 332.50 basis points. Considering that as a basis and observing that financial position of the AE is slightly inferior to the assessee and also the loan advanced is long term, he ultimately directed the TPO to determine the rate of interest at LIBOR / EURIBOR (+) 3.83%.

The learned Counsel for the assessee submitted, during the relevant period, the LIBOR rate for USD loan stood at 0.53% p.a. and the same for URIBOR was 1.1575%. He submitted, considering the LIBOR rate, the interest charged by the assessee at 3% is at arm’s length price (ALP); hence, should not have been disturbed. Proceeding further, he submitted, in Assessment Years 2012-13 and 2016-17, the TPO has accepted the interest charged at 3% to the very same AEs to be at arm’s length. In this context, he drew our attention to the relevant orders passed by the TPO placed in the paper book.

The learned Departmental Representative, drawing our attention to paragraph 6.3.9 of learned Commissioner (Appeals)’s order submitted, in case of similar foreign currency loan advanced by Barclays Bank Plc., the rate of interest charged varied between LIBOR (+) 252, LIBOR (+) 400. Therefore, he submitted, the direction of learned Commissioner (Appeals) to charge interest at LIBOR (+) 3.383% is in order.

We have considered rival submissions and perused materials on record. The dispute is only with regard to the arm’s length rate of interest to be charged on the loan advanced to AE. As could be seen, the TPO has charged arm’s length rate of interest at 14%, whereas, learned Commissioner (Appeals) has reduced it to LIBOR / EURIBOR (+) 3.83%. Admittedly, against the aforesaid decision of learned First Appellate Authority, the revenue is not in appeal. It is the case of the assessee that considering the LIBOR/EURIBOR rate of interest and the interest charged by various banks as noted by learned Commissioner (Appeals) in his order, which varied between LIBOR (+) 1.75% to 4%, the interest charged at 3% is at arm’s length. We have noted, before learned Commissioner (Appeals) the assessee has specifically submitted that the LIBOR rate prevailing during the year was 0.53% p.a. The aforesaid factual position has remained uncontroverted before us. It is further noted by us, in assessee’s own case for assessment years 2012-13 and 2016-17 the interest charged at 3% on the loan granted to the same AE has been accepted by the TPO. Though, these orders passed by the TPO are for subsequent assessment years; however, they have persuasive value while determining the arm’s length rate of interest, as, there is no material change in the factual position. Keeping in view these factors, we hold that interest charged at 3% on the loan advanced to EM Germany should be considered to be at arm’s length. Hence, there is no need for any adjustment. Accordingly, the addition made is deleted.

In grounds 2 & 3, the assessee has challenged disallowance made u/s 14A r.w.r.8D.

Briefly the facts are, during the year under consideration the assessee had earned exempt income by way of dividend amounting to Rs.1,77,16,087/- and by way of long term capital gain amounting to Rs.3,71,43,046/-. In the computation of income, the assessee suo motu made a disallowance of Rs.7,10,356/- towards expenses attributable to exempt income.

The primary contention of the learned Counsel appearing for the assessee is, before rejecting assessee’s computation of disallowance and invoking rule 8D, the Assessing Officer has not recorded proper satisfaction. He submitted, though, the assessee furnished detailed explanation explaining the manner in which suo motu disallowance was made; however, without properly examining the correctness of assessee’s claim having regard to the books of account, the Assessing Officer has simply rejected assessee’s claim. Thus, he submitted, the disallowance made under section 14A r.w.r. 8D should be deleted.

The learned Departmental Representative strongly relying upon the observations of the departmental authorities submitted, the Assessing Officer having recorded proper satisfaction, assessee’s claim should not be accepted.

We have considered rival submissions and perused materials on record. Undisputedly, the assessee has computed suo motu disallowance under section 14A amounting to Rs.7,10,356/-. On a reading of the impugned assessment order it is evident, in response to query made by the Assessing Officer, the assessee has explained in detail the working of disallowance made under section 14A voluntarily. Without pointing out how the voluntary disallowance made by the assessee is incorrect having regard to the books of account maintained by it, the Assessing Officer has simply rejected the computation of the assessee by making general observation that as per the mandate of section 14A(1) and 14A(2) of the Act disallowance has to be computed in terms of rule 8D. Now, legal position is fairly well settled that section 14A(2) of the Act mandates the Assessing Officer to record satisfaction indicating that the disallowance computed by the assessee is incorrect having regard to the books of account maintained by him. This condition has to be satisfied before invoking Rule 8D. In the facts of the present case, though, the assessee in specific terms has provided allocation of various expenditures for earning of exempt income, the Assessing Officer has neither dealt with the assessee’s claim nor has provided any reason as to why the claim of the assessee is not to be accepted in terms of section 14A(2) of the Act. Thus, in our considered opinion, the conditions of section 14A(2) in the present case has not been satisfied. In view of the above, we delete the disallowance of Rs.86,44,811/-.

In the result, appeal is allowed.