2012 (11) TMI 1099 - AT - Income Tax

No Disallowance Under Section 14A on Foreign Dividend Income; ALP Adjustment Under Section 92CA Set Aside

Everest Kanto Cylinder Ltd. Versus Deputy Commissioner of Income-tax (LTU), Mumbai

The ITAT Mumbai held that no disallowance under Section 14A was warranted on dividend income from foreign subsidiaries, as such income is taxable and ... Disallowance u/s 14A - assessee had shown a dividend income and claimed the same as exempt from tax u/s. 10(33) - adjustment made on account of Arms Length Price (ALP) under Section 92CA by the TPO - HELD THAT:- From the records, it is borne out that the assessee has made aggregate investments of ₹ 54.30 crores upto 31st March, 2007, out of which sum of ₹ 41.03 crore have been invested in the equity shares of foreign subsidiaries in UAE. Under the Income Tax Act, the dividend income from the shares held in foreign companies are taxable and, therefore, the provisions of 14A will not get attracted. Therefore, no disallowance can be made under Section 14A on this amount. Out of the balance amount, sum of ₹ 11.09 crore which has been invested in the assessment year 2006-07, it has been held to be made out of the funds raised by way of IPO for sums aggregating to ₹ 90 crore to the interest free funds by the CIT(A). The said order of the CIT(A) has now been affirmed by the Tribunal vide order dated 21-10-2011, wherein it has been held that when the assessee was having sufficient non-interest bearing funds for making investments during the year, then there is no reason to deviate from the findings of the CIT(A). Thus, this amount also cannot be taken into consideration for making any kind of disallowance under Section 14A. Now, the remaining balance amount of investment [i.e 54.30 - (41.03+11.09) = 2.18], which was invested prior to assessment year 2006-07, it is seen from the records that the assessee has huge surplus funds, specifically out of accumulated profits and reserve surplus. In such a situation and in view of the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra), the normal presumption is that investment must have been made out of the surplus funds, unless contrary is brought on record. Thus, from the fund flow statement and as per our finding given above, there is hardly any scope for upholding the view of the CIT(A) and A.O. that the assessee has made all the investment out of interest bearing funds. However, there are huge administrative cost incurred by the assessee and it cannot be said that no cost can be attributable to the earning of exempt income. Therefore, looking to the fact that some administrative cost may be attributable for making of investment and earning of exempt income, therefore, a fair estimate of sum of ₹ 1 lakh is upheld for the purpose of disallowance under Section 14A, which will take care of any kind of possible expenses, which can be said to be attributable to earning of the exempt income. Accordingly, ground No.1 is treated as partly allowed. Arms Length Price (ALP) under Section 92CA by the TPO - In the present case, when the assessee has specifically stated that neither it has incurred any cost for providing the guarantee to the bank for loan taken by its subsidiary nor has undertaken any kind of risk, as it was the subsidiary company which has hypothecated its assets against the loan, the TPO has not brought anything on the record to controvert the same. He has proceeded on the premise that there is always a risk in providing the guarantee and some kind of security is needed for giving a guarantee. Such a premise of the Assessing Officer is without basis or material on record. Thus, applying the rate of 3% on the guarantee commission based on external comparables and that to be on naked quote given in the website, is uncalled for in the present case. We have already come to a conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We also find that in an independent transaction, the assessee has paid 0.6% guarantee commission to ICICI Bank in India for its credit arrangement. This could be a very good parameter and a comparable for taking it as internal CUP and comparing the same with the transaction with the AE. The charging of 0.5% guarantee commission from the AE is quite near to 0.6%, where the assessee has paid independently to the ICICI Bank and charging of guarantee commission at the rate of 0.5% from its AE can be said to be at arms length. The difference of 0.1% can be ignored as the rate of interest on which ICICI Bank, Bahrain Branch has given loan to AE (i.e. subsidiary company) is at 5.5%, whereas the assessee is paying interest rate of more than 10% on its loan taken with ICICI Bank in India. Thus, such a minor difference can be on account of differential rate of interest. Thus, on these facts, we do not find any reason to uphold any kind of upward adjustment in ALP in relation to charging of guarantee commission. Hence, the addition of ₹ 28,50,353/- on account of TP adjustment on guarantee commission is hereby deleted and the order of the CIT(A) is set aside. Accordingly, ground No.2 is treated to be allowed. Resultantly, appeal filed by the assessee is partly allowed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Adjustment of Arms Length Price (ALP) under Section 92CA of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The primary issue was the disallowance of Rs. 20,27,896/- under Section 14A related to the expenditure incurred in earning exempt income. The assessee declared a dividend income of Rs. 31,98,330/- as exempt under Section 10(33). The Assessing Officer (AO) applied Rule 8D, which was effective from AY 2008-09, to compute the disallowance. The CIT(A) upheld the AO's decision, noting that the assessee did not provide specific details in response to the show-cause notice. The CIT(A) referenced the case of Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT, which stated that Rule 8D is applicable from AY 2008-09, but the AO must determine the expenditure on a reasonable basis.The assessee argued that investments were made from surplus funds, including proceeds from an IPO, and no interest cost was incurred for such funds. The CIT(A) dismissed this argument, stating that the assessee did not maintain separate accounts for investments and business funds, leading to the conclusion that indirect interest expenses were incurred.The Tribunal noted that the assessee had significant surplus funds and investments in foreign subsidiaries, whose dividend income is taxable. Hence, no disallowance under Section 14A was warranted for these investments. However, acknowledging the administrative costs, the Tribunal upheld a nominal disallowance of Rs. 1 lakh for administrative expenses related to earning exempt income. Thus, the disallowance under Section 14A was partly allowed.2. Adjustment of Arms Length Price (ALP) under Section 92CA of the Income Tax Act:The second issue concerned the adjustment of Rs. 28,50,353/- made by the Transfer Pricing Officer (TPO) for guarantee commission charged from the assessee's subsidiary. The assessee provided a corporate guarantee to ICICI Bank, Bahrain, for loans to its subsidiary in Dubai, charging a 0.5% guarantee commission. The TPO, referencing various bank rates, benchmarked the ALP for the guarantee commission at 3%, leading to the adjustment.The assessee contended that no cost was incurred for providing the guarantee as the subsidiary had hypothecated its assets, and the 0.5% commission was reasonable. The CIT(A) upheld the TPO's decision, stating that the assessee did not benchmark the transaction and the 3% rate was justified.The Tribunal found that the TPO's application of a 3% rate based on external comparables was not appropriate, as it did not consider the specific circumstances and terms of the transaction. The Tribunal noted that the assessee paid a 0.6% guarantee commission to ICICI Bank in India for its own credit arrangement, which served as a reliable internal comparable. Given the minor difference and the lower interest rate on the subsidiary's loan, the Tribunal concluded that the 0.5% commission charged by the assessee was at arm's length. Consequently, the adjustment of Rs. 28,50,353/- was deleted, and the appeal on this ground was allowed.Conclusion:The appeal was partly allowed, with a nominal disallowance of Rs. 1 lakh under Section 14A upheld and the adjustment of Rs. 28,50,353/- on guarantee commission deleted.