2018 (4) TMI 863 - AT - Income Tax

Tribunal directs AO/TPO on ALP adjustments for interest, reverses Section 14A disallowance, excludes from 115JB book profits.

The appeal was partly allowed. The Tribunal directed the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to verify and compute adjustments related ... Arm's length price - transfer pricing adjustment - associated enterprises - LIBOR+/WIBOR+ benchmark for inter-company loans - recording of satisfaction under section 14A(2) - disallowance under section 14A read with Rule 8D - book profit under section 115JB - remand for verificationArm's length price - transfer pricing adjustment - LIBOR+/WIBOR+ benchmark for inter-company loans - remand for verification - Adjustment to arm's length price in respect of interest on loans to associated enterprises set aside for verification whether loans were advanced on LIBOR+/WIBOR+ rates; matter remitted to Assessing Officer/TPO for computation. - HELD THAT: - The Tribunal noted that identical questions had been decided in the assessee's own earlier years and that, consistent with the ratio in Varroc and the Bombay High Court decision relied upon, the proper approach is to verify whether the loans were advanced at LIBOR+ or WIBOR+ rates. If loans were on LIBOR+/WIBOR+ rates the transaction is within arm's length; otherwise the TPO may re-compute ALP. The Tribunal therefore directed the Assessing Officer/TPO to verify the assessee's claim and recompute any adjustment accordingly, setting aside the impugned addition for fresh consideration. [Paras 9]Addition on account of ALP in relation to interest on loans is set aside and remitted to the Assessing Officer/TPO to verify whether loans were at LIBOR+/WIBOR+ and to compute adjustment, if any.Recording of satisfaction under section 14A(2) - disallowance under section 14A read with Rule 8D - Disallowance under section 14A read with Rule 8D reversed because the Assessing Officer failed to record the required satisfaction under section 14A(2) before invoking Rule 8D. - HELD THAT: - The Tribunal applied the Supreme Court precedents in Godrej & Boyce and Maxopp, and the Tribunal's earlier decisions, holding that the Assessing Officer must record satisfaction that the assessee's suo moto disallowance is incorrect before applying Rule 8D. In the present case the AO did not record the necessary satisfaction; accordingly the Rule 8D disallowance worked out by the AO could not be sustained and was reversed. [Paras 17]Disallowance of Rs. 15,50,542 under section 14A read with Rule 8D is deleted for want of recording of satisfaction under section 14A(2).Book profit under section 115JB - disallowance under section 14A read with Rule 8D - Disallowance under section 14A read with Rule 8D, if any, is not to be added back while computing book profit under section 115JB. - HELD THAT: - Having directed deletion of the section 14A disallowance, the Tribunal further held, following its earlier decisions, that even if a disallowance under section 14A were sustained, it should be excluded from the computation of book profits for section 115JB. The Assessing Officer was directed not to include such disallowance in book profits and to re-compute book profit accordingly. [Paras 23]Assessing Officer directed not to include any section 14A/Rule 8D disallowance as part of book profits under section 115JB; book profit to be re-computed.Final Conclusion: Appeal partly allowed: the transfer pricing addition relating to interest is remitted to the AO/TPO for verification of LIBOR+/WIBOR+ benchmarking and recomputation; the section 14A/Rule 8D disallowance is deleted for failure to record satisfaction under section 14A(2); and any section 14A disallowance shall not be added back in computing book profits under section 115JB. Issues Involved:1. Adjustment to Arm's Length Price (ALP) for interest on loans to Associated Enterprises (AE).2. Disallowance under Section 14A read with Rule 8D.3. Proportionate increase of deduction under Section 10A for disallowance under Section 14A.4. Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JB.Detailed Analysis:Issue 1: Adjustment to Arm's Length Price (ALP) for interest on loans to Associated Enterprises (AE)The assessee contested the addition of Rs. 74,38,465 to the ALP of international transactions related to interest received/receivable on loans extended to AE. The Tribunal noted that the issue had been previously decided in favor of the assessee in its own case for the assessment years 2008-09 and 2009-10. The Tribunal directed the Assessing Officer (AO) to verify whether the loans were advanced at LIBOR+ or WIBOR+ rates. If so, the transactions would be within the arm's length price; otherwise, the Transfer Pricing Officer (TPO) could re-compute the ALP. The matter was thus set aside to the AO/TPO for verification and computation of any necessary adjustment.Issue 2: Disallowance under Section 14A read with Rule 8DThe assessee had suo moto disallowed Rs. 50,000 as expenses related to earning exempt income under Rule 8D(iii). The AO, however, disallowed Rs. 15,50,542. The assessee argued that the AO failed to record satisfaction as required under Section 14A(2) before making the disallowance. The Tribunal referenced the Supreme Court rulings in Godrej & Boyce Manufacturing Co. Ltd. and Maxopp Investment Ltd., which mandate that the AO must record satisfaction that the assessee's disallowance is incorrect before applying Rule 8D. The Tribunal found that the AO had not recorded such satisfaction and thus reversed the disallowance, allowing the assessee's appeal on this ground.Issue 3: Proportionate increase of deduction under Section 10A for disallowance under Section 14AThis was an alternative plea to Issue 2. Since the Tribunal allowed the appeal on Issue 2, the alternate plea did not stand and was not addressed further.Issue 4: Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JBThe assessee argued that the disallowance under Section 14A should not be added to the book profit under Section 115JB. The Tribunal noted that this issue had been decided in the assessee's favor in previous years and by other Tribunal decisions. It directed the AO to exclude any disallowance under Section 14A from the computation of book profits under Section 115JB, aligning with prior Tribunal rulings.Conclusion:The appeal was partly allowed. The Tribunal directed the AO/TPO to verify and compute adjustments related to the ALP for interest on loans to AE, reversed the disallowance under Section 14A due to lack of recorded satisfaction, and excluded the disallowance under Section 14A from the computation of book profits under Section 115JB. The alternate plea regarding Section 10A was not addressed as it was contingent on the disallowance under Section 14A, which was reversed.