2018 (4) TMI 862 - AT - Income Tax

Tribunal allows assessee's appeal on transfer pricing, directs deletion of addition by AO. Revenue's appeal on capital loss dismissed.

The Tribunal allowed the assessee's appeal on the transfer pricing adjustment, directing deletion of the addition made by the Assessing Officer. The issue ... Determination of arm's length interest for foreign currency loan - CUP method in transfer pricing - Applicability of borrower currency market rate for arm's length price - Proportionate disallowance of expenditure under section 14A read with Rule 8D - Exclusion of strategic investments from computation under Rule 8D(2)(iii) - Indexation of cost from the first previous owner under section 49(1) explanation read with sections 46 and 48Determination of arm's length interest for foreign currency loan - CUP method in transfer pricing - Applicability of borrower currency market rate for arm's length price - Notional interest adjustment made by AO (and upheld by CIT(A)) was deleted by Tribunal. - HELD THAT: - The assessee advanced an interest free loan denominated and repayable in Australian dollars to its associated enterprise and computed a notional interest using the CUP method based on the Australian market borrowing rate (8.91%). The AO applied an Indian/domestic benchmark and imposed a 10% rate based on penal/default clauses in the loan agreement. Relying on settled authority and commercial reasoning that the rate applicable to loans repayable in a foreign currency is the market rate for that currency, the Tribunal held that the assessee was right to adopt the Australian rate. The default/penal interest clause, pertaining to post due date contingencies and not operative in the year under consideration, was not a proper basis for overriding the currency specific market rate. On that basis the addition was deleted. [Paras 5]Addition of Rs. 1,92,731/- on account of transfer pricing adjustment deleted; no further arm's length adjustment required.Proportionate disallowance of expenditure under section 14A read with Rule 8D - Exclusion of strategic investments from computation under Rule 8D(2)(iii) - Disallowance under section 14A read with Rule 8D remanded to AO for fresh consideration limited to factual verification of strategic investments and application of law. - HELD THAT: - The AO made a substantial disallowance under Rule 8D having regard to exempt dividend and exempt long term capital gain income. The CIT(A) restricted disallowance to the net expenditure claimed by the assessee, but the Tribunal noted that the additional factual and legal contention - that certain holdings were strategic investments which should be excluded under Rule 8D(2)(iii) - had not been examined by the AO. In view of intervening Supreme Court authority on strategic investments and the settled position that only investments yielding dividend should be taken into account for Rule 8D(2)(iii), the Tribunal remitted the matter to the AO to decide afresh after affording the assessee an opportunity and permitting production of evidence. The AO is directed to pass a speaking order applying the correct legal tests. [Paras 7]Matter remanded to AO to determine disallowance under section 14A/read with Rule 8D(2)(iii) afresh, with opportunity to assessee to substantiate strategic investment claims; CIT(A)'s interim restriction does not finally decide the computation.Indexation of cost from the first previous owner under section 49(1) explanation read with sections 46 and 48 - Assessee's claim to compute indexation from the date the shares were first acquired by the first previous owner was accepted; AO's recomputation was reversed. - HELD THAT: - The shares in question came into the assessee's fold by virtue of amalgamations and earlier acquisitions by predecessor entities. Section 49(1)(iii)(e) and its explanation provide that where an asset becomes the property of an assessee by certain modes of transfer (including amalgamation/merger/liquidation modes covered by the explanation), the cost shall be deemed to be the cost for which the first previous owner acquired it. Following Tribunal and higher court precedent, the Tribunal held that indexation must be done from the original acquisition date by the first previous owner and therefore confirmed the CIT(A)'s allowance of the assessee's larger long term capital loss/carry forward figure rather than the AO's reduced computation. [Paras 12]AO's recomputation disallowing indexation from the first previous owner's acquisition date set aside; assessee's indexation method upheld and carry forward loss accepted as computed by assessee.Final Conclusion: The cross appeals are partly allowed: the transfer pricing addition was deleted; the section 14A/Rule 8D disallowance is remanded to the AO for fresh factfinding and application of law (including determination of strategic investments); and the revenue's challenge to the indexation methodology was dismissed, with indexation from the first previous owner's acquisition date upheld. Issues Involved:1. Transfer Pricing Adjustment.2. Proportionate Management Expenses under section 14A.3. Long Term Capital Gain (Loss) Carry Forward.4. Computation of Long Term Capital Gain (Loss) and Indexation.Detailed Analysis:1. Transfer Pricing Adjustment:The primary issue concerns the determination of the arm's length price for an interest-free loan of AUD 500,000 given by the assessee to its associated enterprise (AE) Technico Pty. Ltd., Australia. The assessee used the Comparable Uncontrolled Price (CUP) method and adopted an 8.91% interest rate, which was the prevailing rate in Australia, resulting in a computed arm's length interest of AUD 44,550 (Rs. 15,75,444). The Assessing Officer (AO) disagreed, deeming a 10% interest rate as reasonable, thereby adding Rs. 1,92,731 as further transfer pricing adjustment. The CIT(A) upheld the AO's decision, but the Tribunal found that the interest rate should be based on the currency of the loan, as supported by the Hon'ble Delhi High Court in CIT Vs. Cotton Naturals (I) (P) Ltd. (2015) and the Hon'ble Bombay High Court in CIT Vs. The Great Eastern Shipping Co. Ltd. The Tribunal concluded that the assessee's adoption of the Australian bank rate was correct, directing the deletion of the addition made by the AO.2. Proportionate Management Expenses under section 14A:The AO disallowed Rs. 3,29,05,581 under Rule 8D for expenses related to exempt income, which the CIT(A) restricted to Rs. 1,22,79,861, the net amount of expenditure claimed by the assessee. The Tribunal noted that the assessee's income streams included interest, dividend, brokerage, profit on sale of investments, and lease rentals. The Tribunal remanded the matter back to the AO to re-evaluate the disallowance under Rule 8D(2)(iii), excluding strategic investments and considering only investments that yielded dividend income, in line with the principles laid down by the Hon'ble Supreme Court in CIT vs Maxopp Investment Ltd.3. Long Term Capital Gain (Loss) Carry Forward:The AO recomputed the long-term capital loss at Rs. 3,75,80,707 instead of Rs. 4,56,14,076 claimed by the assessee, by considering the indexation from the date of amalgamation of the companies. The CIT(A) accepted the assessee's claim, relying on the Tribunal's decision in Smt. Mina Deogun Vs. ITO and the ITAT Special Bench decision in DCIT Vs. Manjula J Shah, which was upheld by the Hon'ble Bombay High Court. The Tribunal confirmed the CIT(A)'s decision, stating that the indexation should be from the original date when the shares were first acquired by the first previous owner.4. Computation of Long Term Capital Gain (Loss) and Indexation:The AO's computation of long-term capital loss was based on the date of amalgamation, whereas the assessee argued for indexation from the original acquisition date by the first previous owner. The Tribunal upheld the CIT(A)'s decision, affirming that the indexation should be from the original date of acquisition by the first previous owner, as per the provisions of sections 46, 48, and 49 of the Income Tax Act.Conclusion:The Tribunal allowed the assessee's appeal regarding the transfer pricing adjustment and remanded the issue of proportionate management expenses under section 14A back to the AO for re-evaluation. The Tribunal dismissed the revenue's appeal concerning the computation and carry forward of long-term capital loss, confirming the CIT(A)'s decision to adopt the indexation from the original acquisition date by the first previous owner. Both appeals were partly allowed for statistical purposes.