Tribunal rules in favor of assessee on Transfer Pricing & Section 14A disallowance

The Tribunal allowed the assessee's appeal regarding Transfer Pricing adjustments and disallowance under Section 14A due to the absence of exempt income. The revenue's appeal was dismissed, and the Assessing Officer was directed to re-examine the disallowance under Section 14A, allowing the assessee a chance to support its position. The decision was rendered on 19/12/2018.

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Issues Involved:

1. Applicability of Section 14A read with Rule 8D for disallowance of administrative expenses.
2. Adjustment to international transactions under Section 92CA(3) of the Income Tax Act, 1961.
3. Determination of the arm's length price (ALP) for interest rates on loans to associated enterprises (AEs).
4. Validity of disallowance under Section 14A in the absence of exempt income.

Detailed Analysis:

1. Applicability of Section 14A read with Rule 8D:

The assessee argued that the provisions of Section 14A read with Rule 8D are not applicable and no disallowance should be made under these provisions. The CIT(A) had confirmed the disallowance of administrative expenses amounting to Rs. 1,88,87,845/- under Rule 8D(2)(iii). The assessee contended that no administrative expenses were incurred attributable to earning income not chargeable to tax. The CIT(A) observed that investments in Special Purpose Vehicles (SPVs) were integral to the assessee's operations, and some indirect expenses were relatable to the receipt of exempt income, necessitating disallowance under Rule 8D(2)(iii).

2. Adjustment to International Transactions:

The assessee challenged the addition of Rs. 11,04,04,539/- made by way of adjustment to the international transaction as per the order of the Deputy Commissioner of Income Tax, Transfer Pricing. The CIT(A) upheld the TP adjustments, relying on the ITAT, Mumbai's decision in Aurionpro Solutions Ltd. Vs. ACIT, which stated that the tested party under Transfer Pricing guidelines was the assessee, and the interest rate should be determined based on what the assessee could have expected to earn in a similar transaction with an unrelated party.

3. Determination of ALP for Interest Rates:

The TPO used the CRISIL credit rating scale to determine the ALP of the interest rate at 15.41%, resulting in a shortfall of Rs. 11,04,04,539/-. The assessee contended that the ALP should be benchmarked based on the rate of interest in the country where the loan is received/consumed, citing the Bombay High Court's decision in Tata Autocomp Systems Ltd. The Tribunal agreed, stating that the ALP should be determined using LIBOR and EURIBOR rates, not Indian rates. The A.O/TPO was directed to benchmark the interest charged based on these international rates.

4. Validity of Disallowance under Section 14A in Absence of Exempt Income:

The assessee argued that no disallowance under Section 14A was warranted as no exempt dividend income was earned during the year. The Tribunal found merit in this argument, citing the Delhi High Court's decision in Cheminvest Ltd. Vs. CIT, which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. The Tribunal directed the A.O to re-adjudicate the issue, considering that no disallowance under Section 14A is warranted in the absence of exempt income.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the TP adjustments and the disallowance under Section 14A in the absence of exempt income. The revenue's appeal was dismissed. The A.O was directed to re-adjudicate the disallowance under Section 14A, providing the assessee an opportunity to substantiate its claim. The order was pronounced on 19/12/2018.

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