ORIENTAL AROMATICS LTD,MUMBAI vs. DCIT CIR 1(2)(2), MUMBAI

The assessee has raised 12 grounds of appeal. Ms. Usha Kadam, appearing on behalf of the assessee submitted at the outset that she would not be pressing ground No.1 to 3 of the appeal.

Per contra, Shri Uodal Raj Singh, representing the Department vehemently defended the impugned assessment order. However, the ld. Departmental Representative admitted that the TP adjustment in respect of interest on loans to AE was made in assessment year 2010-11 and 2011-12, as well. The Tribunal has adjudicated this issue in assessee’s appeals for the aforesaid assessment years.

We have heard the submissions made by rival sides and have perused the orders of authorities below. There are two issues in appeal for our consideration i.e.: i. TP adjustment w.r.t. interest on loans advanced to AE; and ii. Disallowance u/s 14A r.w.r. 8D.

The ld. Authorized Representative of the assessee stated at the Bar that she is not pressing grounds of appeal no. 1 to 3, these grounds are dismissed as not pressed, accordingly.

In grounds of appeal No.4 to 6, the assessee has assailed TP adjustment of Rs.77,22,054/- on account of interest on loans advanced to AE. The assesse has purportedly advanced interest free loans to its AE. The TPO in order to benchmark the loan transaction at arm’s length applied LIBOR +3% rate of interest. The contention of the assesse is that only LIBOR rate should be applied without any mark-up. We find that the Hon'ble Bombay High Court in the case of CIT vs TATA Autocomp Systems Ltd. (supra) has upheld the order of Tribunal in determining ALP of loans advanced to overseas AE at EURIBOR/LIBOR rates without any mark-up. We further observe that in the immediately preceding assessment years, the TPO had made similar adjustments qua interest on loans advanced to AE. The Co-ordinate Bench directed the TPO to apply LIBOR rates to benchmark Arm’s Length Price (ALP) of International Loan Transaction. Thus, in the light of the afore mentioned judgement of the Hon’ble Jurisdictional High Court and the order of Tribunal in assessee’s own case, we direct the TPO to apply LIBOR rate to benchmark the transactions of loan advanced to AE during the relevant period. The grounds of appeal No.4 to 6 are partly allowed, accordingly.

The grounds of appeal No.7 to 11 are on disallowance made under section 14A r.w.s. 8D. The assessee during the period relevant to assessment year under appeal has earned dividend income of Rs.2,01,121/-. The Assessing Officer has made disallowance of Rs.23,08,734/- under section 14A r.w.s. 8D(2)(iii). The Hon'ble Apex High Court in the case of PCIT vs. State Bank of Patiala reported as 99 taxmann.com 286 has approved that disallowance under section 14A of the Act is to be restricted to exempt income earned. Thus, in the light of above, we direct the Assessing Officer to restrict disallowance under section 14A r.w.r. 8D to the extent of exempt income earned by the assesse during the relevant period. The grounds of appeal No.7 to 11 are partly allowed.

In the result, appeal of the assessee is partly allowed.