TaxTMI 
TaxTMI 
2015 (4) TMI 1253
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....t been applied despite the fact that the mode of computation of the disallowance is similar as that has been mentioned in Rule 8D of the IT rules. 1.2 Not appreciating the directions of the DRP in correct sense that the methodology prescribed in the Rule 8D of the IT rules, should not be followed while making the disallowance. 1.3 Making the disallowance without establishing the nexus between dividend income and the expense debited to the Profit and Loss Account for the year under consideration. 2. That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient 'to refer the matter to the Ld. Transfer Pricing Officer ('TPO') for computation of the Arm's Length Price (ÁLP'), as is required under section 92CA (1) of the Income Tax Act, 1961 ('the Act'). 3. The Ld. DRP erred both on facts and in law in confirming the Ld. AO/TPO's action of making an adjustment of Rs. 4,61,99,357 to the income of the appellant by holding that the international transactions of the appellant pertain....
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....nd or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing." 2. We have heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 3. The basic facts of the case are that the assessee company i.e. Motherson Sumi System Ltd. ( in short MSSL) is a leading solutions provider for automotive electrical distribution systems. The assessee company is a joint venture between Motherson Auto Pvt. Ltd., Sumitomo Wiring Systems Ltd., Japan and Nishho Iwai Corporation, Japan. MSSL's operations are mainly divided into four broad division i.e. The first division i.e. the Wiring Harness Division, manufactures Integrated Wiring Harnesses. The second division, SPBU Division, is into manufacturing of cooling fans for computer server. The 3rd Division, the PVC Wires Division, manufactures a wide range of wires for the automotive applications as well as domestic/industrial application. The 4th is polymer division which manufactures injection molded, blow molded, compression molded and vacuum formed components. "....
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....td ('Mew. Sri Lanka) 6% April 2005 8.11% 7.26%" 4. For transfer pricing the assessee clubbed its international transactions into three classes. While manufacturing activity has been categorized into class one, receipt of interest on loan has been categorized into class two and reimbursement of expenses have been categorized into class three. The dispute in the present appeal is restricted to class two transaction raised in ground Nos. 3, 4 and 5 so far as transfer pricing is concerned. The same will be adjudicated upon in the succeeding paragraphs. 5. Besides in ground No.2, the issue raised is regarding the validity of disallowance of Rs. 20,42,826 under sec. 14A of the Act. 6. Ground No.1 is general in nature, hence, it does not need independent adjudication. 7. Ground Nos. 2, 2.i, 2.iii & 2.iii: The Assessing Officer made disallowance of Rs. 20,42,826 under sec. 14A of the Income-tax Act, 1961 after applying Rule 8D of the Income-tax Rules, 1962. The learned DRP has upheld the same. 8. In support of the grounds, the Learned AR submitted that the authorities below are not correct in applying Rule 8D of the Income-tax Rules, 1962 for making the disallowance under sec.....
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....OP/TC has been selected as the PLI. The OP/TC of the assessee is calculated at 16.69%, while the mean OP/TC of 25 comparables has been calculated at 9.47%. For class-II transactions of receipt of loan, the assessee has used CUP method for benchmarking. The assessee has used alternate investment opportunity in the bank FD as the benchmark. It is stated that the average return earned on a bank deposit was 7.26% p.a., during the year. After adjusting for 6 months average forward premium, it is stated that the effective earning was higher than the bank FD interest amount. Therefore, the transaction are stated to be at Arm's Length. Loans to the Subsidiaries: 6MSSL has extended foreign currency loans to four of its Subsidiaries. As per TP Report, the details of these loans are provided in following table: Loan Amount Borrowing entity Rate of Interest (%) Start date of loan Effective Interest Rate (IN INR terms) Comparable Interest rate on alternate investment option Euro1,000,000 Motherson Sumi Systems Limited Mauritius Holdings Ltd 4.5% October 2003 7.79% 7.26% Euro 5,000,000 Motherson Sumi Systems Limited Mides (FZE) 5% April 2005 8.29% 7.26% Euro 150,0....
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....It was submitted that the assessee had conducted a corroborative analysis by examining third party loan agreements for bench marking the loan transactions by taking the overseas subsidiaries as the tested party. The credit rating of the subsidiary was determined using S&P Corporate rating criteria. Based upon the implied credit rating, a search was conducted in the LPC loan connector data base. The result of search were as under: Borrowing entity Implied Credit Rating Interest Charged Interest Rate as per the Search Motherson Sumi Systems Limited Mauritius Holdings Ltd BB- 4.5% (Euro) 4.54% Motherson Sumi Systems Limited Midest (FZE) A 5%(Euro) 2.03% Motherson Sumi Sustems Limited Handels GmbH B- 4.2% (Euro) 6 months Euribor + 205bps Motherson Electrical Wires Lanka (Pvt) Ltd ('MEW, Sri Lanka) BBB+ 6% (USD) 4.81% 15. The assessee stated that since the interest rate charged to the subsidiaries is higher, therefore, by selecting the overseas subsidiary as the tested party, also substantiate that the interest has been charged at arm's length. In support, the learned AR referred page Nos. 384 to 387 of the paper book filed on behalf of the assessee i.e.....
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.... to the contrary, merely because some interest has been paid in the immediately preceding year, it cannot be assumed that the assessee borrowed funds in the immediately preceding year was the source for the purpose of advancing loans to its AE. Having regard to the overall circumstances of the case we are of the view that the issue stands squarely covered by the decision of the ITAT Delhi Bench in the case of Cotton Naturals (I) P. Ltd. Wherein the Bench observed that the CUP method is the moist appropriate method in order to ascertain arm's length price of the international transaction i.e, where the lending of money was in foreign currency to its AE the domestic prime lending rate would have no applicability and the interbank rate fixed should be taken as benchmark rate for international transactions. WE, therefore, hold that LIBOR rate has to be adopted in the instant case since the interest charged by the assessee from its AE is higher than the LIBOR rate in the year under consideration no transfer pricing adjustment in that regard is warranted. We therefore set aside the order of the AO in this regard and allow the grounds urged by the assessee." 18. Again in the case of ....
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....Applying the provisions of Rule 8D of the Income-tax Rules, 1962 ('the Rules') in complete disregard to express provisions of sec. 14A(2) wherein it is mandate that the ld. A.O. should record its satisfaction on incorrectness of the claim of the assessee in respect of the exempt income. 2.2 Without prejudice to the contention of the Appellant that no disallowances is warranted under sec. 14A of the Act read with Rule 8D of the Rules, the Ld. A.O. erred in making the disallowances of Rs. 3,890,801 which is excessive and unreasonable as dividend income received during the year is merely Rs. 292,753. 3. That the reference made by the A.O. suffers from jurisdictional error as the Ld. A.O. has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's length ('ALP'), as is required under sec. 92CA(1) of the Income-tax Act, 1961 ('the Act'). 4. The Ld. DRP erred both on facts and in law in confirming the Ld.A.O/TPO's action of making an adjustment of Rs. 2,41,94,156 to the income of the appellant by holding that ....