TaxTMI 
TaxTMI 
TaxTMI 
2018 (4) TMI 862
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....als) 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, interest, brokerage etc .. For that the learned CIT(Appeals) erred in making the said disallo....
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....rst 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 discussion, it is held that the interest rate of 8.91% adopted by the assessee cannot be the arm's length interest rate in an uncontrolled environment and the sam....
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....h 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 borrower shall pay the lender interest at 10% per annum or 1% over the prevailing bank rate whichever is higher for the period of delay beyond the due date i.e. 24.08.201....
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....f 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 rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national cur....
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....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 Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in th....
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....d 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 management expenses under Rule 8D of the Rules of an amount of Rs. 3,29,39,053/- which resulted in a net disallowance of Rs. 3,29,05,581/-. On appeal, the Ld. CIT(A) gave partial relief to the assessee and restricted the disallowance u/....
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....vestment 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. Brief facts of the case are that the assessee is a finance and investment company and wholly owned subsidiary of ITC Ltd. The assessee filed return of income electronically on 29.09.2009 showing total income of Rs. 2,09,16,511/- and revised return....
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....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/s. MAL in the FY 1993- 94 and that M/s. Sage Investments Ltd. has directly purchased 3,70,000 shares of MAL in the FY 1993-94. In the light of the aforesaid history, the indexation cost was adopted by the assessee from the original date when th....
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....1.02.1999 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 decision in the case of Smt. Mina Deogun Vs. ITO reported in (2008) 117 TTJ 121 (Kol) as well as the decision of the ITAT Special Bench in the case of DCIT Vs. Manjula J Shah 318 ITR 417 which was later upheld by the Hon'ble Bombay High Court has decided in....