2021 (10) TMI 276 - AT - Income Tax

Tribunal decision: Interest income upheld, subsidiary interest expenses deleted, adhoc disallowance removed.

M/s Uniparts India Ltd. Versus The Dy. C.I.T. Circle - 18 (1) New Delhi

The tribunal partly allowed the appeal, upholding the addition of interest received from Associated Enterprises but directing the deletion of ... TP Adjustment - Addition of interest expenses - interest received by assessee on loans extended to its associated enterprises (‘AEs’) - TPO adopting credit rating of BB, which prompted him to adopt the LIBOR rate with add on of 400 basis points - HELD THAT:- UUL agreed to repay the loan as and when sufficient funds are available with it and if not repaid, then agreed that the outstanding loans, together with accumulated interest, to be converted into common stock or preferred stock of UUL at any point of time. These clauses in the loan agreement are nothing but eye-wash as the appellant company is the holding company of the borrower and have sanctioned loan for unsecured junior debt loan upto US$ 7 million. The above facts have to be considered alongwith the fact that UUL has its Registered Office in the State of the Delaware, USA and in its fourth year of operations, it employed four employees for managing its warehousing operations. Considering the facts of the case in hand in light of the two loan agreements mentioned elsewhere, and considering the fact that the assessee itself has charged interest @ 8% in the case of UUL and 6.138% in the case of UBV, we do not find any error or infirmity in the transfer pricing approach of the TPO upheld by the DRP. Ground No. 3 with all its sub-grounds is dismissed. Lower interest charged @ 6% instead of 16% from its wholly owned subsidiary company - HELD THAT:- As on receiving financial assistance from the assessee, revenue from sales of M/s UniLink Engineering Pvt Ltd increased from ₹ 94.73 lakhs from F.Y 2005–06 to ₹ 26.12 crores in F.Y 2008–09. We further find that own funds of the assessee as on 31.03.2007 were at ₹ 33.35 crores which jumped to ₹ 127.62crores as on 31.03 2009 and tp ₹ 139.17 crores as on 31.03.2009. Loan was given in earlier F.Y and the assessee had sufficient own funds to give the loan. It is equally true that no disallowance was made in the earlier Assessment Year though the DRP has observed that rest judicata is not applicable under Income Tax proceedings but, in our considered opinion, when the facts are same, and the law has not changed, then the rule of consistency ought to have been followed. Considering the facts of the case in totality, we do not find any merit in the addition made by the Assessing Officer. We, accordingly, direct the Assessing Officer to delete the same. Ground No. 4 is, accordingly, allowed. Disallowing 5% of expenses on adhoc / estimated basis out of claim of deduction under the head “Ocean, Air Freight and Marine Insurance” - HELD THAT:- As assessee was specifically asked to justify the increase in expenses incurred on Air/ocean freight and marine insurance. It is equally true that before the DRP the assessee explained the increase by filing documentary evidences showing that these expenses were incurred on CIF basis. Assessing Officer himself has admitted in his second remand report that the assessee was able to justify the increase of expenses under this head. We are of the considered view that unless there is a limitation put by law on the amount of expenditure, a lesser amount expended cannot be allowed merely because the assessing authority thinks that the assessee could have managed by paying lesser amount as a prudent business man. Hon'ble Supreme Court in the case of Walchand & Co. Pvt Ltd [1967 (3) TMI 2 - SUPREME COURT] has held that the test of prudence by substituting its own view in place of business man’s is not acceptable. Considering the fact that disallowance made by the assessee was purely on adhoc basis and restricting the disallowance by the DRP is also on adhoc basis. We, therefore, do not find any merit in the impugned addition. The Assessing Officer is directed to delete the addition. Issues Involved:1. Arbitrary and unlawful assessment of income.2. Addition on account of interest received from Associated Enterprises (AEs).3. Disallowance of interest expenses due to lower interest charged from a subsidiary.4. Adhoc disallowance of expenses under the head 'Ocean, Air Freight and Marine Insurance'.Issue-wise Detailed Analysis:1. Arbitrary and Unlawful Assessment of Income:The assessee contended that the assessment order passed by the Learned Assessing Officer (Ld. AO) and confirmed by the Learned Dispute Resolution Panel (Ld. DRP) was arbitrary and against the law and facts of the case. The Ld. AO assessed the income of the appellant at Rs. 15,32,52,150/- against the returned income of Rs. 13,76,59,264/-.2. Addition on Account of Interest Received from AEs:The assessee challenged the addition of Rs. 26,23,286 on account of interest received on loans extended to its AEs. The Ld. AO and Ld. DRP did not consider the economic analysis performed by the assessee for benchmarking such interest rates and proposed the addition based on arbitrary selection of arm's length interest rate. The TPO observed that the interest rate for loans in different currencies should be benchmarked against the prevailing interest rate for loans denominated in that currency only. The TPO adopted the LIBOR rate with an additional markup of 4% due to the credit rating of 'BB' for the loans given by the assessee to its subsidiary. The DRP upheld the TPO's approach, and the tribunal found no error or infirmity in the transfer pricing approach of the TPO upheld by the DRP, dismissing the ground.3. Disallowance of Interest Expenses Due to Lower Interest Charged from Subsidiary:The Ld. AO disallowed a sum of Rs. 72,23,773/- out of total interest expenses of Rs. 10.78 crores on account of lower interest charged at 6% instead of 16% from its wholly-owned subsidiary. The assessee argued that the subsidiary was incurring losses, and the management decided to charge a lesser rate of interest. The DRP upheld the disallowance, stating that the commercial expediency of advancing the loan at a lower rate could not be established. However, the tribunal noted that the loan was given in an earlier financial year when no disallowance was made, and the assessee had sufficient own funds to give the loan. The tribunal directed the Assessing Officer to delete the addition, allowing the ground.4. Adhoc Disallowance of Expenses under 'Ocean, Air Freight and Marine Insurance':The Ld. AO made an adhoc disallowance of 10% amounting to Rs. 1,14,91,649/- under the head 'Ocean, Air Freight and Marine Insurance' due to a significant increase in these expenses compared to the previous year. The DRP restricted the disallowance to 5% amounting to Rs. 57,45,825/-. The tribunal found that the assessee justified the increase in expenses by filing documentary evidence showing that these expenses were incurred on a CIF basis. The tribunal held that the disallowance was made purely on an adhoc basis without proper justification and directed the Assessing Officer to delete the addition, allowing the ground.Conclusion:The appeal was partly allowed. The tribunal upheld the addition on account of interest received from AEs but directed the deletion of disallowances related to interest expenses charged from the subsidiary and the adhoc disallowance of 'Ocean, Air Freight and Marine Insurance' expenses.