Section 14A reasonable-basis disallowance and foreign currency loan benchmarking shaped the transfer pricing outcome.

For a year before Rule 8D applied, section 14A disallowance for exempt dividend income had to be computed on a reasonable basis, so the assessee's suo motu apportionment of treasury and administrative was accepted and the further disallowance was deleted. For interest on foreign currency loans advanced to a subsidiary, domestic rupee lending rates were held to be an improper benchmark; the correct comparison was with foreign currency borrowing rates and market context, showing the interest charged was at arm's length. No transfer pricing adjustment was warranted.

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Issues: (i) Whether disallowance under section 14A for exempt dividend income for the assessment year could be worked out by applying Rule 8D or was to be confined to the assessee's suo motu disallowance on a reasonable basis. (ii) Whether the transfer pricing adjustment on interest charged on foreign currency loans advanced to the assessee's subsidiary was sustainable.

Issue (i): Whether disallowance under section 14A for exempt dividend income for the assessment year could be worked out by applying Rule 8D or was to be confined to the assessee's suo motu disallowance on a reasonable basis.

Analysis: Rule 8D was held to be inapplicable for the year under consideration, and the disallowance had to be determined on a reasonable basis. The assessee had furnished its working for apportionment of treasury and administrative expenditure, and the earlier year's view in the assessee's own case was followed. The additional disallowance made by applying Rule 8D was not accepted.

Conclusion: The assessee's suo motu disallowance under section 14A was accepted and the further disallowance was deleted.

Issue (ii): Whether the transfer pricing adjustment on interest charged on foreign currency loans advanced to the assessee's subsidiary was sustainable.

Analysis: The adjustment made by the transfer pricing authorities proceeded on incorrect facts and on an improper benchmark. For foreign currency lending, domestic rupee lending rates were not the correct reference. The assessee's own foreign currency borrowing rates and the surrounding foreign currency market context showed that the interest charged on the subsidiary loans was at arm's length. The reliance on the higher benchmark adopted by the lower authorities was rejected.

Conclusion: No transfer pricing adjustment on the interest charged to the subsidiary was warranted.

Final Conclusion: The appeal of the assessee succeeded on the section 14A and transfer pricing issues, while the Revenue's appeal failed on those issues; the remaining grounds were disposed of in line with the earlier year's view.

Ratio Decidendi: For a year prior to the applicability of Rule 8D, section 14A disallowance must be made on a reasonable basis, and interest on foreign currency loans to an associated enterprise must be benchmarked with appropriate foreign currency comparables rather than domestic rupee rates.

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