Tribunal grants relief on transfer pricing adjustments, restores admin expenditure issue, allows education cess deduction.

The Tribunal partly allowed the assessee's appeals by deleting the transfer pricing adjustments on interest-free loans to an overseas associate enterprise, restoring the administrative expenditure disallowance issue for fresh computation, and allowing the deduction of education cess and secondary higher education cess. The order was pronounced on 17/01/2020.

---

---

Issues Involved:
1. Transfer pricing adjustment on interest-free loans to overseas associate enterprise.
2. Disallowance under Section 14A read with Rule 8D for administrative expenditure.
3. Allowability of education cess and secondary higher education cess under Section 40(a)(ii) read with Section 37(1) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment on Interest-Free Loans to Overseas Associate Enterprise:
The assessee challenged the correctness of transfer pricing adjustments of Rs. 8,19,134/- and Rs. 6,27,062/- for the assessment years 2010-11 and 2011-12, respectively. These adjustments pertained to interest-free loans of AUD 5,00,000 provided to an overseas associate enterprise, Technico Pty Ltd., Australia. The assessee had adopted the Comparable Uncontrolled Price (CUP) method, using an arm's length interest rate of 8.91% prevailing in Australia during 2008, which was not accepted by the Assessing Officer (AO). The AO instead applied a 10% interest rate based on the loan agreement's penal clause, resulting in additional adjustments. The CIT(A) upheld the AO's decision. However, the Tribunal found that the interest rate should be based on the currency in which the loan was to be repaid (AUD) and not the Indian bank rate. Citing judgments from the Hon'ble Delhi High Court and the Hon'ble Bombay High Court, the Tribunal held that there was no necessity for any arm's length adjustment and directed the deletion of the impugned adjustments.

2. Disallowance Under Section 14A Read with Rule 8D for Administrative Expenditure:
The assessee contested disallowances of Rs. 98,47,788/- and Rs. 34,79,136/- for the assessment years 2010-11 and 2011-12, respectively, relating to administrative expenditure under Section 14A read with Rule 8D. The assessee had derived exempt income from dividends and mutual funds and had made suo motu disallowances. The AO invoked Rule 8D(2)(iii) for administrative expenditure disallowance, which was partially upheld by the CIT(A) with directions to exclude strategic investments and investments not yielding exempt income. The Tribunal noted that a similar issue in the previous assessment year (2009-10) was restored to the AO for fresh computation. Following judicial consistency, the Tribunal restored the issue back to the AO for computation of administrative expenditure disallowance using a proportionate formula, emphasizing that indirect expenditure cannot be strictly apportioned between business activities and deriving exempt income.

3. Allowability of Education Cess and Secondary Higher Education Cess Under Section 40(a)(ii) Read with Section 37(1):
The assessee sought to allow education cess and secondary higher education cess as deductions under Section 40(a)(ii) read with Section 37(1). The Revenue opposed the admission of this additional ground at a belated stage. The Tribunal, referencing the Hon'ble Supreme Court's decision in National Thermal Power Corporation Ltd. and the Tribunal's special bench order in All Cargo Global Logistics Ltd., admitted the additional ground. The Tribunal noted that the relevant statutory provisions and the CBDT’s Circular did not include "Cess". Citing the Hon'ble Rajasthan High Court's judgment in Chembal Fertilizers & Chemicals Ltd. and the Tribunal's decision in ITC Ltd., the Tribunal directed the AO to grant necessary relief to the assessee, allowing the deduction of education cess and secondary higher education cess.

Conclusion:
The Tribunal partly allowed the assessee's appeals, deleting the transfer pricing adjustments, restoring the administrative expenditure disallowance issue for fresh computation, and allowing the deduction of education cess and secondary higher education cess. The order was pronounced in the open court on 17/01/2020.

---