Assessee's 15% FCCD interest rate upheld as arm's length against TPO's 12.58% reduction under Section 14A

ITAT Surat upheld CIT(A)'s order deleting transfer pricing adjustment on FCCD interest payments. The assessee's 15% coupon rate was deemed arm's length based on comparable market rates of 16.95% and proximity to SBI prime lending rate of 14.75%. TPO's reduction to 12.58% was unjustified. Additionally, ITAT confirmed deletion of Section 14A disallowance as assessee had sufficient interest-free funds for exempt income investments, with investments reducing to nil during the year. Revenue's appeals dismissed on both grounds.

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Issues Involved:

1. Upward adjustment of Rs. 2,81,77,494/- on account of interest payment on FCCDs.
2. Deletion of addition made on account of disallowance under section 14A of the Act amounting to Rs. 11,54,002/-.
3. Reversal of suo-motu disallowance made by the assessee under section 14A of the Act.

Summary of Judgment:

Issue 1: Upward adjustment of Rs. 2,81,77,494/- on account of interest payment on FCCDs

The Revenue challenged the deletion of an upward adjustment of Rs. 2,81,77,494/- proposed by the TPO on account of interest payment on FCCDs. The TPO had re-computed the Arm's Length Price (ALP) of interest payment on FCCDs at 12.58% p.a. instead of 15% p.a. as determined by the assessee. The assessee argued that the same interest rate was accepted in the previous assessment year (AY 2013-14) and there was no change in the terms of the debentures. The CIT(A) found the TPO's comparables to be inappropriate as they included companies in different industries and with different credit ratings. The CIT(A) accepted the assessee's comparables and concluded that the 15% coupon rate was close to the prevalent SBI prime lending rate of 14.75%. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and noting no change in facts from the previous assessment year.

Issue 2: Deletion of addition made on account of disallowance under section 14A of the Act amounting to Rs. 11,54,002/-

The Revenue contested the deletion of an addition made under section 14A of the Act amounting to Rs. 11,54,002/-. The assessee had earned dividend income and made a suo-motu disallowance of the same amount under section 14A. The Assessing Officer (AO) applied Rule 8D and computed a higher disallowance. The CIT(A) deleted the additional disallowance, noting that the assessee had sufficient interest-free funds to cover the investments and relied on precedents that support no disallowance under section 14A when the assessee has surplus funds. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the conclusion that the assessee had sufficient non-interest-bearing funds.

Issue 3: Reversal of suo-motu disallowance made by the assessee under section 14A of the Act

The assessee's cross-objection sought the reversal of the suo-motu disallowance made under section 14A. The Tribunal noted that this issue was already addressed in the context of the Revenue's appeal and thus dismissed the cross-objection as infructuous.

Conclusion:

The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decisions on both issues. The cross-objection filed by the assessee was also dismissed as infructuous.

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