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Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-57, Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The 1st ground raised
by the assessee in this appeal is that the Ld. CIT(A) erred in confirming the disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962. 2.1 During the year under consideration, the assessee-company had received dividend income of Rs.3,73,015/- which is exempt u/s 10(34). The AO worked out the disallowance u/s 14A r.w Rule 8D and made a disallowance of Rs.10,26,352/-. 2.2 In appeal, the Ld. CIT(A) held that the disallowance of interest should be made with reference to net interest. She directed the AO to recompute the disallowance accordingly. 2.3 Before us, the Ld. counsel of the assessee submits that its own funds is much more than the investments. Therefore, the disallowance made by the AO under Rule 8D (2) (ii) is not called for. 2.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 2.5 We have heard the rival submissions and perused the relevant materials on record. We find from the balance sheet of the assessee- company as at 31st March 2010 that its own funds was Rs.2,894,197,392/-. The investment as at 31st March 2010 was Rs.868,635,071/- In HDFC Bank Ltd. vs. DCIT [2016] 67 taxmann.com
42. (Bom), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) held as under :
Roha Dyechem Pvt. Ltd. “15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities & Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue in as much as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities & Power Ltd. (supra) in its application to Section 14A of the Act.”
In view of the above, we delete the disallowance of Rs.8,67,592/- made by the AO under Rule 8D (2)(ii). 2.5.1 In Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT (2010) 194 Taxman 203 (Bom.) the Hon'ble Bombay High Court has explained Rule 8D as under : “As regard Rule 8D(2)(iii), it had been submitted that some mechanism or formula had to be adopted for attributing part of the administrative / managerial expenses to tax-exempt investment income. The administrative expenses attributable to tax-free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee Roha Dyechem Pvt. Ltd. 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager.
While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment.”
Accordingly, we confirm the disallowance of Rs.1,58,760/- made by the AO under Rule 8D(2)(iii). 2.6 Thus the 1st ground of appeal is partly allowed.
3. The 2nd ground raised by the assessee in this appeal is that the Ld. CIT(A) erred in confirming the foreign travel expenses of Rs.5,87,917/-. 3.1 Briefly stated, the facts of the case are that the assessee-company has debited Rs.1,04,84,826/- towards foreign travel expenses consisting of trip expenses of Rs.58,79,168/- and ticket expenses of Rs.46,05,658/-. Before the AO, the assessee failed to establish that these expenses were for business purposes. Therefore, the AO disallowed 10% of the trip expenses of Rs.58,79,168/- considering it as personal in nature. 3.2 In appeal, the Ld. CIT(A) sustained the above disallowance of Rs.5,87,917/- on the ground that the assessee failed to produce before the AO the evidence to substantiate its claim. 3.3 We have heard the rival submissions and perused the relevant materials on record. We find that the assessee failed to file necessary evidence before the AO and the Ld. CIT(A) to substantiate its claim of Roha Dyechem Pvt. Ltd. Rs.58,79,168/-. We find that the reasonable disallowance @ 10% made by the AO which comes to Rs.5,87,917/- has been rightly sustained by the Ld. CIT(A). We uphold the same. 3.4 Thus the 2nd ground of appeal is dismissed.
4. We take up the 3rd, 4th and 5th ground of appeal together as they address a common issue. The 3rd ground of appeal is that the Ld. CIT(A) erred in confirming a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) which is bad in law. The 4th ground of appeal is that the Ld. CIT(A) erred in confirming that non charging of interest is not at arm’s length. The 5th ground of appeal is that the Ld. CIT(A) erred in confirming the non charging of administrative charges is not at arm’s length. 4.1 In a nutshell, the facts are that the assessee has charged interest ranging from 5% to 8% from its AEs and in some cases no interest was charged. Before the TPO, the assessee failed to demonstrate the circumstances under which such differential rates of interest were charged. The TPO observed that the weighted average cost of the assessee’s borrowing is 6% p.a. As per the TPO, the assessee in an arm’s length scenario must charge at least a rate equal to its WACB cost of borrowing. In addition to that it has also to protect itself against various risk factors such as entity risk, currency risk and country specific risk. The TPO observed that banks and financial institutions charge loan processing fee ranging from 1-2% to cover their administrative costs. The TPO thus held that a mark up of 3% on WACB will represent the arm’s length price in the present case. Hence one has to arrive at the Roha Dyechem Pvt. Ltd. 3%. The assessee has stated before the TPO that the domestic cost of borrowing was 6%. The TPO thus determined the interest at 6% domestic cost of borrowing plus 3% exchange risk. A mark up of 2% risk is charged and 1% being charged as administrative cost. The TPO thus calculated the rate of interest at 9% and computed adjustment at Rs.79,20,972/-. This amount has been added by the AO in the assessment order dated 14.03.2014. 4.2 In appeal, the Ld. CIT(A) held as under: “I have gone through the facts of the case. It is undisputed that the appellant has advanced loans to 8 of its Associate enterprises. Out of these 8, the AO has concluded that in 5 cases either no interest has been charged or low rate of interest has been charged. The AO has adopted the reasoning that no 3rd party would extend facility of Finance to these AEs without charging interest. The AO has thereby calculated the charging of the interest on the basis that the average domestic cost of borrowings for the assessee is 6% p.a, adding to this the various risk factors and other processing costs etc. for which 3% mark up is required the cost of capital for the AEs should be at 9% p.a. interest rate. On the other hand, the appellant has submitted that it has given loans to the AEs for expansion and since they were all newly established, they were not able to earn sufficient profits to pay interest. It is further reasoned by the appellant that since the assessee is charging comparative sale rate in supplying of materials to AE and AE has to supply the materials in their territory of operations in comparative with the local manufacturers; AE could not generate sufficient profits. Given the present facts I am of the considered view that the decision of the Hon'ble Delhi HC in the case of Cotton Naturals India P. Ltd. AY 2007-08 Delhi High Court -taxsutra.com becomes the guiding decision wherein it was held that interest rate should be market determined and should be applicable to the currency in which the Roha Dyechem Pvt. Ltd. loan is borrowed/repaid. In the present case, loans are given as per dollar currency and there is merit in the argument of the AO that the AEs would not able to get access to capital in the open market without paying any interest. In this regard reference is also made to the decision of the Hon'ble ITAT, Mumbai 'K’ bench in ITA No 488/MUM/2015 in the case of Fire Star International P. Ltd. announced on 31/07/2015. In the said decision it has been held that interest rate charged at LIBOR+300 bps is liable to be considered as an ALP rate of interest. The AO is accordingly directed to re- calculate the rate of interest accordingly instead of 9% that has been adopted. The above three grounds are accordingly decided.”
4.3 Before us, the Ld. counsels of the assessee reiterated the submission made before the Ld. CIT(A). 4.4 On the other hand, the Ld. DR supported the order passed by the Ld. CIT(A). 4.5 We have heard the rival submissions and perused the relevant materials on record. We find that there is no infirmity in the reference made to the TPO u/s 92CA(1). Accordingly, we dismiss the 3rd ground of appeal. 4.6. We find that in respect of the 4th and 5th ground of appeal the Ld. CIT(A) has rightly held that interest rate be charged at LIBOR + 300 bps as an ALP rate of interest. More reasonably, the Ld. CIT(A) has directed the AO to recalculate the rate of interest accordingly instead of 9%. We do not find any basis to disturb such a reasonable view of the Ld. CIT(A) which is based on the decision in Cotton Naturals India P. Ltd. (supra)
Roha Dyechem Pvt. Ltd. Fire Star International P. Ltd. (supra). Accordingly, we uphold the order of the Ld. CIT(A) and dismiss the 4th and 5th ground of appeal
5. In the result, the appeal is partly allowed.