TaxTMI 
TaxTMI 
2018 (4) TMI 862
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....T circulars on the subject. For that the learned CIT(Appeals) erred in not considering the Accountant's Report under section 92E and Form 3CEB wherein the detailed analysis and justification was given for the application of the CUP method in determining the arm's length notional interest income. For that the learned CIT(Appeals) was not justified in arbitrarily applying 10% rate without considering the provisions of the Income Tax Law. Relief Prayed: The addition of Rs. 1 ,92,731/- should be deleted. 2. Proportionate Management Expenses under section 14A: (Rs. 1,22,79,861 - Rs. 33,472)= Rs. 1,22,46,389/- For that the learned CIT(Appeals) erred in applying the formula under rule 80, restricted to the extent of the net expenditure claimed, ignoring the decisions of the Appellate Authorities in respect of the appellant company for the earlier years. For that the learned CIT(Appeals) was not justified in disallowing the entire amount of expenditure (net) claimed, although the appellant company was involved in various financing 1 investment activities and had taxable business income like profit/loss on stock-in-trade, lease rental,....
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....ar, whereas, no such restriction is provided either in the provisions of section 14A of the IT Act. 1961 or rule-8D of the IT Rules1962." 3. First of all we will decide the transfer pricing issue of assessee's appeal. Brief facts of the issue are that the assessee company during the AY 2008-09 had given an interest free loan of AUD 5,00,000 to its associated enterprise (AE) Technico Pty. Ltd., Australia (TPL). For the purpose of determining the arm's length nature of the transaction, the assessee adopted CUP method and took the arm's length rate of interest @ 8.91% as was prevailing in Australia during the year 2008. The assessee thus computed the arm's length interest of AUD 44,550 which was converted into Indian currency i.e. Rs. 15,75,444/- using the exchange rate as on 31.03.2009. During the assessment proceedings, the assessee filed before the AO copy of the loan agreement and written submission towards justification of arm's length interest computed by the assessee. But the AO did not agree with the interest rate of 8.91% adopted by the assessee and according to him, 10% interest rate would be reasonable and held as under: "4.3. In the light of the above discussio....
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....ch is an Australian company from an Australian Bank at the same point of time. The arms length rate of interest was determined using the average rate of interest which was the borrowing rate applicable to corporate's which prevailed in Australia during the current year 2008. The assessee extracted the information from the International Monetary Fund (IMF) data base and the arm's length rate of interest for the current year 2008 mentioned was 8.91% and the assessee computed the amount of arm's length interest denominated in AUD by applying the arm's length interest rate to the amount of loan. Thereafter, the assessee added the arm's length value of interest to its income and offered it to tax thereon. The assessee calculated amount of interest as per AUD came to AUD 44,550 which was converted into Indian currency using the exchange rate applicable as on 31.03.2009 i.e. AUD is equal to Rs. 35.3635 which was not acceptable to the AO though the AO agreed to the CUP method. According to AO, the loan agreement vide clauses 3 and 5 reveals that as soon as the AE ceases to be a wholly owned subsidiary of the assessee interest shall be charged @ 1% over the prevailing bank rate and the borr....
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....D 500,000. So, the loan amount given and have to be repaid is in AUD 500,000. We note that the assessee for the purpose of determining the arm's length nature of the transaction has taken the rate of interest of the same amount if it had been borrowed by the Australian company from an Australian bank at the said point of time and has adopted interest rate of 8.91%. The issue which is before us as to the rate of interest in such a scenario is no longer res integra. The Hon'ble Delhi High Court in CIT Vs. Cotton Naturals (I) (P) Ltd. (2015) 55 taxmann.com 523 (Del) at para 39 and 40 has answered this question as under: "39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest ra....
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....propriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to ‗eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money." 40. The aforesaid methodology recommended by Klau....
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....xempt Long term capital gains of Rs. 2,10,48,497/- i.e. total exempt income of Rs. 25,00,93,591/-. Since the assessee on its own did not disallow any expenses u/s. 14A of the Act for earning such exempt income, the AO being dissatisfied with the accounts of the assessee computed the disallowable expenses by applying rule 8D of the Rules and made addition of Rs. 3,29,05,581/-. On appeal, Ld. CIT(A) directed the AO to restrict the disallowance u/s. 14A of the Act to the net amount of expenditure claimed Rs. 1,22,79,861/- as against the disallowance made at Rs. 3,29,39,053/- by the AO. Aggrieved by the decision of Ld. CIT(A), both the parties are in appeals before us. 7. We have heard rival submissions and gone through facts and circumstances of the case. We note that the assessee company has earned exempt dividend income of Rs. 22,99,44,794/- and exempt long term capital gain of Rs. 2,01,48,797/-. According to the assessee, no specific/direct expenses were incurred in relation to exempt income. However, the assessee company had determined the disallowance u/s. 14A of the Act of Rs. 33,472/-. However, the AO did not accept the said stand of the assessee and disallowed proportionate....
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....14A read with Rule 8D(2)(iii) the settled position as on date is that only while computing Rule 8D(2)(iii) investments which have yielded dividend should only be taken into account while making the computation under Rule 8D(2)(iii) i.e. investment in dividend bearing scrips only to be taken into for consideration. Therefore, we remand the matter back to the file of AO to decide this issue afresh keeping in mind the aforesaid observation of ours and in accordance to law. The assessee is at liberty to file evidence to substantiate its case as regards the additional ground of strategic investment is concerned. The AO is directed to pass a speaking order after hearing the assessee afresh on facts and law regarding the same. Therefore, the grounds of appeal filed by the assessee as well as by the revenue are allowed for statistical purposes. 8. Now coming to the revenue's appeal. We note that the major grievance of the revenue is against the action of the Ld. CIT(A) in directing the AO to allow Long Term Capital Gain/loss carry forward at Rs. 4,56,14,076/- against the amount of Rs. 3,75,80,707/- computed by the AO as per the provisions of sections 46, 48 and 49 of the Act. 9. Brie....
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....he original date, when the shares were first acquired by the first previous owner and when computed accordingly the LTCG/loss is of Rs. 4,56,14,076/- and AO by recomputing erred in reducing the carry forward loss to the tune of Rs. 80,33,369/-. We note that the in the relevant assessment year, the assessee company realized as liquidation proceeds Rs. 32,26,400/- on account of 14,80,000 equity shares of M/s. Minota Aquatech Ltd. (MAL) which went into liquidation in the year under consideration. According to the assessee, the shares of M/s. MAL were acquired through the process of amalgamation of two other subsidiaries i.e. M/s. Sage Investments Ltd. (Sage) and M/s. Summit Investments Ltd. (SIL) on 01.0-2.1999 (FY 1998-99). It was brought to our notice that M/s. Sage Investment Ltd. had directly purchased 222,000 shares and 5,92,000 shares of M/s. MAL in the FY 1993-94 and 1997-98 respectively. Further, another 2,96,000 shares of MAL were acquired by M/s. Sage Investments Ltd. by way of merger of another subsidiary of ITC Ltd. i.e. M/s. Pinnacle Investments Ltd. (PIL) with the assessee. It was brought to our notice that M/s. Pinnacle Investment Ltd. have acquired the said shares of M....
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....revious owner of the assessee and, therefore, he computed the long term capital loss at Rs. 3,75,80,707/- by holding as under: "3.4 Adverting to the facts of the case all over again, the assessee held 14,80,000 shares of MAL with effect from 01.02.1999 by virtue of amalgamation of SIL and SMIL with it. The company MAL was liquidated in the previous year 2008-09 and the assessee as a shareholder received liquidation proceeds amounting to Rs. 32,26,400/- on 24.03.2009. A liquidation per se will not amount to transfer within the meaning of section 2(47). But section 46(2) provides a deeming fiction stipulating that where a shareholder on the liquidation of a company receives any money or other assets from the company, he shall be chargeable to income-tax under the head "capital gains". Also the money so received shall be deemed to the full value of the consideration for the purposes of section 48. Therefore, keeping in view the provisions of sections 46, 48, 49 and in view of the discussion made in para 3.3 above, the long term capital loss arising on account of liquidation of MAL is assessed at Rs. 3,75,80,707/-." 11. On appeal the Ld. CIT(A) relying on the Tribunal's dec....
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....eritance or devolution or (b) on any distribution of assets on the dissolution of firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987, or (c) on any distribution of assets on the liquidation of a company, or (d) under a transfer to a revocable or an irrevocable trust, or (e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or or clause (vica) or clause (vicb) or clause (xiii) or clause (xiiib) or clause (xiv) of sec. 47 of the Act. Then such assessee being a Hindu undivided family, by the mode referred to in sub-section (2) of section 64 at any time after the 31st day of December, 1969. So, where the capital asset became the property of an assessee by any of the modes i.e. stated above, then the cost of the acquisition of the asset shall be deemed to be the cost for which the first previous owner of the property who acquired it and as per the explanation given the 'previous owner' would not be the last previous owner of the capital asset as held by AO. This decision of ours has been consistently taken by this Tribunal in ....