2016 (10) TMI 1264 - AT - Income Tax

Tribunal rules in favor of assessee on Income Tax Act Section 14A disallowance and transfer pricing adjustments.

M/s. Siva Industries & Holdings Ltd. Versus Assistant Commissioner of Income Tax, Company Circle VI (3), Chennai And Vice-Versa.

The Tribunal ruled in favor of the assessee regarding the disallowance under Section 14A of the Income Tax Act, stating no disallowance can be made if no ... Disallowance u/s.14A - main contention of the ld.A.R before the DRP is that the assessee company has made strategic equity investment in Tata Tele Services Ltd.,(TTSL), an unregistered telecom company of the Tata Group and that TTSL is a huge loss making company and hence, no dividend was received from it during the year - HELD THAT:- In this case the undisputed facts are that the assessee not able to show that sources of funds were diverted into investment in shares, which has not yielded any interest or dividend income, even if assessee earned dividend income, it is exempted u/s.10(33) of the Act from the tax liability and the same cannot be computed under the head “income from other sources”. The expenditure relating to exempted income is not liable for deduction in view of Sec.14A of the Act. In view of this, the claim of assessee is only untenable and decision relied upon by the ld.A.R before the Ld.CIT(A) have no application to the facts of the case. The jurisdictional High Court in the case of CIT Vs. Seshasayee Paper And Boards Ltd. r [1984 (4) TMI 17 - MADRAS HIGH COURT] wherein held that the borrowing has not been made exclusively and wholly for the purpose of earning interest, in which case alone it should be taken as income, which should be deducted from the interest receipts. Also in the case of Pradeep Kar Vs. ACIT [2009 (6) TMI 331 - KARNATAKA HIGH COURT] wherein held that dividend income being exempt u/s.10(33) and not assessable to tax, assessee was not entitled to deduction for interest in view of Sec.14A of the Act. Accordingly, this ground of the assessee stands dismissed. TP Adjustment - interest received at 6% p.a. from his wholly owned subsidiary India Telecom Holdings Ltd, Mauritius - HELD THAT:- The similar issue came up for consideration before the Mumbai Bench of Tribunal in the case of DCIT (International Taxation) Vs. Development Bank Of Singapore [2013 (8) TMI 175 - ITAT MUMBAI] considering the LIBOR as one comparable uncontrolled interest rate, in our considered opinion is a restricted and narrow approach incapable of acceptance. Since the LIBOR is not a rate in itself at which some bank is willing to borrow or lend, but an average of rates at which various panel banks offer to borrow or lend inter bank offers, the same cannot be characterized as one price determined under the comparable uncontrolled price method. It is required to be considered as arithmetical mean of such prices, thereby making available the option of plus minus 5 percent variation to the assessee. As the present addition made by the AO was the outcome of not allowing plus minus 5 percent cushion, which in our considered opinion is richly due to the assessee, we hold that the learned CIT(A) was justified in deleting this addition - Decided in favour of assessee. Transfer Pricing adjustment in respect of guarantee fee - HELD THAT:- This issue came up for consideration before this Tribunal in the Case of Redington India Ltd. Vs. JCIT [2014 (10) TMI 669 - ITAT CHENNAI] relying on BHARTI AIRTEL LIMITED (BHARTI CRESCENT) VERSUS ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 2, NEW DELHI [2014 (3) TMI 495 - ITAT DELHI] that providing corporate guarantee does not involve any cost to the assessee and it is not an “international transaction”, even under the definition of the said term as amended by the Finance Act, 2012, as it does not have any bearing on profits, income, losses or assets of the assessee company. - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Adjustment to interest income based on Transfer Pricing Order.3. Transfer Pricing adjustment in respect of guarantee fee.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The common issue across the assessment years pertains to the disallowance under Section 14A of the Income Tax Act. The Assessing Officer (AO) disallowed expenses related to earning exempt income, such as dividends, by invoking Section 14A read with Rule 8D. The assessee contended that the investments were strategic and not aimed at earning exempt income, citing previous favorable Tribunal decisions. The Tribunal, referencing various High Court decisions, held that Section 14A disallowance is not applicable if no exempt income is earned during the year. Therefore, the Tribunal decided in favor of the assessee, stating no disallowance under Section 14A can be made if the assessee has not received any exempt income.2. Adjustment to Interest Income Based on Transfer Pricing Order:The AO made an adjustment to the interest income received from the assessee's wholly-owned subsidiary, based on the Transfer Pricing Officer's (TPO) order. The TPO benchmarked the interest rate using the Comparable Uncontrolled Price (CUP) method, comparing it to the interest rate paid by a subsidiary to Standard Chartered Bank, resulting in an upward adjustment. The Tribunal, referencing the Mumbai Bench decision in the case of Development Bank of Singapore, held that the LIBOR rate should be considered as an average of rates, allowing a 5% variation. Consequently, the Tribunal allowed the assessee's appeal, rejecting the TPO's adjustment.3. Transfer Pricing Adjustment in Respect of Guarantee Fee:The TPO made an adjustment for the guarantee fee provided by the assessee to its Associated Enterprises (AEs), initially set at 3.5% but later directed by the Dispute Resolution Panel (DRP) to be 1%. The Tribunal referenced the decision in Redington India Ltd. vs. JCIT, where it was held that providing a corporate guarantee does not involve any cost to the assessee and is not an international transaction under the amended definition by the Finance Act, 2012. The Tribunal decided in favor of the assessee, stating that the corporate guarantee provided to AEs does not constitute an international transaction for determining the Arm's Length Price (ALP).Conclusion:- The Tribunal partly allowed the assessee's appeals concerning disallowance under Section 14A and adjustments to interest income, while dismissing the repetitive appeal for the assessment year 2010-11.- The Tribunal dismissed both the Revenue's appeals regarding the guarantee fee adjustment and upheld that providing a corporate guarantee does not constitute an international transaction.