Tribunal affirms CIT(A) decisions, rejects revenue appeal on interest, guarantees, disallowance. Accrued interest deletion upheld.

Deputy Commissioner of Income Tax, Circle-4 (2), Kolkata Versus M/s. Manaksia Limited

Deputy Commissioner of Income Tax, Circle-4 (2), Kolkata Versus M/s. Manaksia Limited - TMI Issues Involved:
1. Upward adjustment towards arm’s length interest on loan given to associated enterprise.
2. Determination of arm’s length price (ALP) on corporate guarantee on loans availed by associated enterprise.
3. Disallowance under Section 14A read with Rule 8D.
4. Addition towards accrued interest on loan.

Issue-wise Detailed Analysis:

1. Upward Adjustment towards Arm’s Length Interest on Loan Given to Associated Enterprise:
The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for calculating the arm’s length interest rate on a loan advanced by the assessee to its Associate Enterprise (AE), EuroAsian Ventures FZE. The TPO applied the Comparable Uncontrolled Price (CUP) method and benchmarked the interest rate against local rates, arriving at an arm’s length interest rate of 20.15%, resulting in an upward adjustment of Rs. 6,97,64,000/-. The assessee contended that it had charged 5% interest, which was at arm’s length when benchmarked against the US LIBOR. The CIT(A) determined that the CUP method was appropriate and held that an interest rate of LIBOR plus 2% was reasonable. Since the interest charged by the assessee was higher than LIBOR plus 2%, the adjustment made by the TPO was deemed unjustified. The Tribunal upheld the CIT(A)’s decision, finding no infirmity in the same and dismissing the revenue’s ground.

2. Determination of ALP on Corporate Guarantee on Loans Availed by Associated Enterprise:
The CIT(A) held that the Transfer Pricing (TP) provisions did not apply to transactions of providing corporate guarantees prior to the amendment by the Finance Act, 2012. The CIT(A) also found the TPO’s methodology for computing the ALP of the transactions to be without a reasonable basis. The Tribunal referred to the decision in M/s. EIH Ltd. vs. DCIT, which clarified that the issuance of a corporate guarantee by a parent company to its AE, without any consideration, does not constitute an international transaction under Section 92B(1) of the Act. The Tribunal upheld the CIT(A)’s order, dismissing the revenue’s ground.

3. Disallowance under Section 14A Read with Rule 8D:
The CIT(A) found that the assessee had sufficient interest-free funds amounting to Rs. 49,367.68 Lakhs to justify the investment of Rs. 40.02 Lakhs. Applying the decision in CIT vs. HDFC Bank Ltd. and other relevant decisions, the CIT(A) concluded that no disallowance could be made under Section 14A read with Rule 8D(ii). The Tribunal found no infirmity in the CIT(A)’s finding and upheld the same, dismissing the revenue’s ground.

4. Addition towards Accrued Interest on Loan:
The CIT(A) applied the ‘real income theory’ and deleted the addition of Rs. 9,69,178/- towards accrued interest on loans given to three parties, which had become non-realisable. The CIT(A) reasoned that once the loans had become Non-Performing Assets (NPAs) and the realization of the principal was uncertain, recognizing interest was not warranted. The Tribunal upheld the CIT(A)’s action, finding no infirmity, and dismissed the revenue’s ground.

Conclusion:
The appeal of the revenue was dismissed, with the Tribunal upholding the CIT(A)’s decisions on all four grounds.