Citation Codes

Equivalent Citations

citation codes

Case Number

ITA 1090/KOL/2017

Attorney(S)

Acts

u/s 143(3) of the Income Tax Act, 1961;
u/s. 14A r.w.s. Rule 8D disallowance(s)
COMPANIES ACT 1956

See more information ...

Smart Summary

Concise Analytical Summary of the Tribunal Opinion

Factual and Procedural Background

This summary is based exclusively on the provided Tribunal order dated 17/01/2020 delivered by a Bench comprising S.S. Godara (Judicial Member) and A.L. Saini (Accountant Member) in the appeals filed by Russell Credit Ltd. against the orders of the Commissioner of Income Tax (Appeals)-22, Kolkata dated 30.10.2017 and 23.03.2017. The appeals relate to assessment years 2010-11 and 2011-12 and arise from proceedings under section 143(3) of the Income Tax Act, 1961.

Key factual matrix (as recorded in the opinion): Russell Credit Ltd. had advanced an interest-free loan of AUD 500,000 to its associated enterprise Technico Pty. Ltd., Australia. The Assessing Officer made transfer pricing adjustments (notional interest) and invoked disallowances under section 14A read with Rule 8D for administrative expenditure attributable to exempt income (dividends and mutual funds). The assessee raised an additional ground seeking allowance of education cess and secondary higher education cess under section 40(a)(ii) read with section 37(1).

The Tribunal noted that the issues in the two appeals were identical and therefore adjudicated them together. The order records earlier relevant proceedings (including a Tribunal disposal in AY 2009-10) and applies judicial authorities in reaching its conclusions.

Legal Issues Presented

Whether the transfer pricing adjustment made by the Assessing Officer in respect of the interest-free loan of AUD 500,000 (i.e., computation of notional interest and choice of interest benchmark) was correct.
Whether disallowances under section 14A read with Rule 8D — administrative expenditure attributable to exempt income — were correctly computed, and if so, the proper method of apportionment.
Whether the assessee's additional ground to allow education cess and secondary higher education cess (invoked under section 40(a)(ii) read with section 37(1)) should be admitted and granted.

Arguments of the Parties

Appellant's (Assessee's) Arguments

For transfer pricing: The assessee applied the Comparable Uncontrolled Price (CUP) method and used an arms-length interest rate of 8.91% (derived from IMF data) reflecting the Australian borrowing rate for the currency (AUD) in which the loan was made and repayable; accordingly the assessee computed and offered notional interest of AUD 44,550 (converted to Rs.15,75,444).
For section 14A/Rule 8D disallowance: The assessee contended that administrative expenditure is an indirect head and must be apportioned between expenditure incurred for business purposes and that incurred for deriving exempt income; reliance was placed on this Tribunal's coordinate bench decision in Maruti Traders & Investors v. ACIT which advocates proportionate allocation (exempt income/total turnover) for computing the administrative expenditure under Rule 8D(2)(iii).
For the additional ground (cess): The assessee sought admission of the ground under settled law (citing National Thermal Power Corp. Ltd. and tribunal/special bench authority) on the basis that the relevant facts were on record and thus the additional ground could be entertained to determine correct tax liability.

Respondent's (Revenue's) Arguments

For transfer pricing: The Assessing Officer did not accept the 8.91% rate and instead relied on the penal clause(s) of the loan agreement (and an ambiguity about whether "bank rate" referred to Indian or Australian banking rates), adopting a 10% rate (or 1% over prevailing bank rate, resulting effectively in 10%) to compute notional interest and making an addition of Rs.1,92,731 for AY 2008-09 (which formed the basis for similar adjustments in the years under appeal).
For section 14A/Rule 8D disallowance: The Revenue maintained that the Assessing Officer had correctly applied the statutory formula under Rule 8D and that the issue (how to apply apportionment) was pending/fresh in prior assessment year(s), implying the Assessing Officer's computation should be sustained.
For the additional ground (cess): The Revenue contended the additional ground should not be admitted at a belated stage, particularly where relevant facts were not part of the record.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Tribunal order in AY 2009-10 (ITA Nos. 629 & 674/Kol/2013 decided 11.04.2018)	Deletion of an identical transfer pricing adjustment under the same head in an earlier year (treated as a binding/precedential outcome in the factual matrix).	The Tribunal observed the issue was no longer res integra and relied on the earlier deletion in concluding that similar transfer pricing adjustments in the present appeals should be deleted.
CIT v. Cotton Naturals (I) (P) Ltd. (Delhi High Court) (2015) 55 taxmann.com 523	Interest rate for loans should be the market-determined rate applicable to the currency in which the loan is to be repaid; the currency determines the relevant interest benchmark.	The Tribunal applied this principle to hold that, because the loan was made and repayable in AUD, the Australian interest rate benchmark (not Indian rates or penal contractual rates) was the appropriate arms-length parameter.
Klaus Vogel on Double Taxation Conventions (Third Edition) — paragraph cited	Analytical support for the economic principle that interest levels depend primarily on the currency concerned rather than the residency of parties.	The Tribunal relied on the methodology and economic reasoning in this text to support the conclusion that currency-specific interest rates (i.e., Australian rates for an AUD loan) are the appropriate benchmark.
CIT v. The Great Eastern Shipping Co. Ltd. (Bombay High Court) ITA No.1455 of 2014 dated 28.06.2017	Arms length price for loans advanced to AEs is to be determined on the basis of rate of interest charged in the country where the loan is received/consumed.	The Tribunal cited and applied this ratio to reinforce that Australian interest rates govern the arms-length determination for the AUD loan.
Maruti Traders & Investors v. ACIT (ITAT, Kolkata) — ITA Nos. 846/Kol/2017 & 637/Kol/2018 (coordinate bench)	Proportionate allocation (exempt income/total turnover) is an appropriate method for computing administrative expenditure under Rule 8D(2)(iii) after Rule 8D insertion.	The Tribunal directed restoration of the section 14A/Rule 8D disallowance issue to the Assessing Officer for recomputation using the proportionate formula as per this coordinate bench decision.
National Thermal Power Corporation Ltd. v. Commissioner of Income-tax (1998) 229 ITR 383 (SC)	Principle allowing admission of additional grounds where relevant facts are on record so the correct tax liability can be determined.	The Tribunal admitted the assessee's additional ground on education cess on the basis that relevant facts were available on record and in light of this apex court authority.
All Cargo Global Logistics Ltd. v. DCIT (2012) 137 ITD 26 (Mumbai) — Special Bench	Supports the proposition that additional grounds can be entertained under circumstances where facts are on record (applied in conjunction with NTPC).	The Tribunal relied on this special bench order to justify admitting the additional ground regarding educational cesses.
Chembal Fertilizers & Chemicals Ltd. (Rajasthan High Court) D.B. Tax Appeal No.52 of 2018	Statutory provisions and CBDT Circular (18.05.1967) do not include cess for the purposes argued by Revenue.	The Tribunal cited this decision in concluding that the assessee was entitled to relief on the cess issue and directed the Assessing Officer to grant necessary relief.
ITC Ltd. case (ITAT, Kolkata) ITA No.685/Kol/2014 dated 27.11.2018 (coordinate bench)	Decision addressing inclusion/exclusion of cess for related disallowance issues (supporting assessee's position).	The Tribunal relied on this coordinate bench decision as additional support for directing relief to the assessee on the cess point.

Court's Reasoning and Analysis

The Tribunal’s reasoning proceeds in distinct strands corresponding to the three primary issues:

1. Transfer Pricing / Notional Interest

The Tribunal examined the loan documentation (loan agreement dated 24.08.2007 and promissory note) and observed that the loan was made in AUD 500,000 and the promissory note expressly required repayment in AUD on or before 22.08.2010; this fact establishes that the loan amount and repayment are denominated in Australian dollars.
Given that the loan is currency-specific (AUD), the Tribunal applied the analytical principle — as articulated in CIT v. Cotton Naturals and supported by Klaus Vogel and the Bombay High Court in Great Eastern Shipping — that the relevant interest benchmark is the market rate applicable to the currency in which the loan is denominated and repayable, i.e., the Australian borrowing rate for AUD.
The Tribunal rejected the Assessing Officer’s reliance on the penal clause and the adoption of Indian bank rates (which yielded an effective 10% rate) for the purpose of determining the arms-length interest rate for an AUD loan, noting that clauses imposing penal interest are relevant only on default beyond the due date and were not relevant to the assessment year under consideration.
Because the assessee had used the Australian rate (8.91% from IMF data) and computed and offered notional interest, and because the Tribunal accepted the currency-based methodology, it concluded there was no need for further arms-length adjustment.
The Tribunal also noted that the identical issue had been decided in the assessee’s earlier year (AY 2009-10) resulting in deletion of the adjustment, and treated that outcome as persuasive/controlling for the present appeals.

2. Section 14A read with Rule 8D Disallowance

The Tribunal recognized that the disallowance under section 14A r.w.s. Rule 8D relates to an indirect head of expenditure that cannot be strictly segmented between regular business activities and activities relating to exempt income.
It accepted the assessee's and coordinate-bench authority reasoning (Maruti Traders & Investors) that administrative expenditure under Rule 8D(2)(iii) should be computed by proportionately allocating expenditure between business and exempt income (for example, by the ratio of exempt income to total turnover).
Accordingly, rather than deciding the precise quantum itself, the Tribunal restored the matter to the Assessing Officer for recomputation of the Rule 8D disallowance in both assessment years in accordance with the proportionate formula as per the cited coordinate-bench precedent.

3. Admission and Merits of the Additional Ground (Education Cess and Secondary Higher Education Cess)

The Tribunal considered the Revenue's objection to admitting the additional ground as technical/ belated but referred to National Thermal Power Corporation Ltd. (SC) and the All Cargo special bench holding that an additional ground can be entertained where the relevant facts are already on record and admission is necessary to determine the correct tax liability.
Finding the relevant facts on record, the Tribunal admitted the additional ground and addressed the merits. It relied on the Rajasthan High Court decision in Chembal Fertilizers and the Tribunal's coordinate-bench decision in ITC Ltd. to conclude that the statutory provisions and the CBDT circular relied upon do not include cess in the manner urged by Revenue.
Consequently, the Tribunal directed the Assessing Officer to grant relief to the assessee in respect of the education cess and secondary higher education cess amounts recorded for the two assessment years.

Holding and Implications

The Tribunal's disposition is summarized as follows:

On transfer pricing: The Tribunal allowed the assessee's ground and deleted the impugned transfer pricing adjustments. Specifically, it deleted identical transfer pricing adjustments of Rs. 8,19,134 and Rs. 6,27,062 (assessment year-wise as recorded in the order).
On section 14A / Rule 8D disallowance: The Tribunal accepted the assessee's grievance in part and restored the issue to the Assessing Officer for recomputation of the administrative expenditure disallowance in both assessment years using a proportionate apportionment formula (as per the coordinate-bench decision referenced).
On the additional ground (education cess and secondary higher education cess): The Tribunal admitted the additional ground and directed the Assessing Officer to grant relief in respect of the cesses (the order records the assessee's corresponding cess figures as Rs. 18,85,062 and Rs. 6,67,018 for the two assessment years respectively).

Final disposition in the order: the two appeals were "partly" allowed in the terms recorded by the Tribunal. The order was pronounced in open court on 17/01/2020 and copies were directed to the assessee (Russell Credit Ltd.) and Revenue authorities as listed in the order.

Implications: The immediate effects are the deletion of the identified transfer pricing additions, recomputation of Rule 8D disallowances by the Assessing Officer using a proportionate formula, and grant of relief on education cesses for the amounts noted. The Tribunal relied on existing High Court, Supreme Court and coordinate-bench authorities for its conclusions; the opinion itself does not purport to establish a novel legal principle beyond applying and following those precedents.

Order pronounced: 17/01/2020. Bench: (A.L. Saini) (Accountant Member) and (S.S. Godara) (Judicial Member). Parties: Russell Credit Ltd. v. Addl. CIT Range-8 / DCIT Circle-8, Kolkata.

Show full summary ...

To access the original judgment, please Sign In or Subscribe.

Russell Credit Limited, Kolkata v. DCIT, Circle-8, Kolkata, Kolkata

PER S.S.Godara, Judicial Member:- These two assessees appeal(s) for assessment year(s) 2010-11 and 2011-12 arise against the Commissioner of Income Tax (Appeals)-22 Kolkatas separate orders dated 30.10.2017 & 23.03.2017 passed in case Nos.45/CIT(A)-22/Kol/10-11/17-18 & 54/CIT(A)-22/Kol/11-12/16-17; respectively, involving proceedings u/s 143(3) of the Income Tax Act, 1961; in short to as the Act. Heard both the parties. Case file(s) perused. We notice at the outset that all the issues raised in these two appeal(s) are identical. We accordingly deem it appropriate to adjudicate assessees instant appeal(s) together for the sake of convenience and brevity. ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 2

2. The assessees first and foremost identical substantive ground in its two appeal(s) challenges correctness of learned lower authorities action making transfer pricing adjustment of 8,19,134/- and 6,27,062/-; (assessment year-wise) respectively, regarding its interest free loans of AUD 5,00,000 provided to the overseas associate enterprise M/s Technico Pty Ltd. Australia since financial year 2007-08. Both the learned representatives are fair enough at the outset that this first issue involved in both these years is no more res integra since the tribunals order in assessment year 2009-10 involving Revenue and assessees cross-appeals ITA Nos.629 and 674/Kol/2013 decided on 11.04.2018 has deleted identical adjustment under the very head as follows:-

3. First of all we will decide the transfer pricing issue of assessees 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 arms length nature of the transaction, the assessee adopted CUP method and took the arms length rate of interest @ 8.91% as was prevailing in Australia during the year 2008. The assessee thus computed the arms 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 arms 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 arms length interest rate in an uncontrolled environment and the same is accordingly rejected. Taking into account the totality of facts of the case, it is deemed reasonable to take the arms length interest rate at 10% and thus the amount of interest payable is worked out at 5,00,000 x 10% x Rs.35.3635 = Rs.17,68,175/-. Since the assessee has already offered arms length adjustment of Rs.15,75,444/-, the balance of Rs.1,92,731/- is now added back as further transfer pricing adjustment. On appeal, the Ld. CIT(A) while dismissing the assessees appeal has held as under: I have carefully considered the submission and argument put forth on behalf of the appellant, perused the facts of the case including the observation of the AO, the various clauses in the ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 3 Loan Agreement and other materials brought on record. I do not find any merit in the argument advanced on behalf of the appellant simply because as to why the appellant itself offered the notional interest @ 8.91 % on the amount of borrowed fund given to the subsidiary company even though no interest is receivable as per the normal clause of the Loan Agreement in normal situation and the interest is chargeable only in exceptional circumstances, as claimed by the appellant. On the other hand, the action of the AO is found to be justified as he has calculated the notional interest on the basis of the rate mentioned in the penal clause of the Loan Agreement. Under this circumstances and perusing the facts of the case, I am of the view that the action of the AO in computing the chargeable interest @ 10% and thereby making the addition of Rs. 1,92,731/- is justified and hence the same is hereby upheld. Thus, this ground of appeal is dismissed. Aggrieved, the assessee is in appeal before us.

4. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee has granted an interest free loan of AUD 5,00,000 to its AE Technico Pty. Ltd. during the FY ended on 31.03.2008. For the purpose of determining the arms length nature of the transaction, the assessee considered the same from the perspective of the TPL. According to the assessee, the objective to do so was to determine the rate of interest at which the same amount could have been borrowed by the AE which 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 corporates which prevailed in Australia during the current year 2008. The assessee extracted the information from the International Monetary Fund (IMF) data base and the arms length rate of interest for the current year 2008 mentioned was 8.91% and the assessee computed the amount of arms length interest denominated in AUD by applying the arms length interest rate to the amount of loan. Thereafter, the assessee added the arms 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. 24.08.2010. According to AO, the expression bank rate noted in the agreement does not expressly specifies whether it refers to the bank rate prevailing in India or Australia. Therefore, he has adopted the bank rates in India and was of the opinion that 10% ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 4 interest need to be computed for the amount given to the AE and thereafter, made an addition of Rs.1,92,731/-. We note that the clauses referred to i.e. 3 and 5 in the agreement is only in cases of default of non-payment which will arise only not before the due date i.e. on 24.08.2010 and has got no relevance in the assessment year under consideration. On perusal of the Promissory Note given by the borrower AE which is placed at page 34 of the paper book reveals as under: PROMSSORY NOTE AUD 500,000 In consideration of the loan of AUD 500,000 (Australian Dollars Five hundred Thousand only) advanced to us by Russell Credit Limited, a company incorporated under the Companies Act 1956 and having its registered office at Virginia House, 37 Chowringhee, Kolkata-700 071 in terms of the loan agreement dated 24th August, 2007, we Technico Pty Limited ACN 063 602 782, a company incorporated under the laws of Australia and having its registered office at C/- PKF, Level 10, Margaret Street, Sydney NSW 2000, Australia, promise to repay to Russell Credit Limited on or before 22nd August, 2010 the said loan amount of AUD 500,000 together with interest, if any payable, under the aforesaid loan agreement dated 24th August, 2007. Sd/- David Charles McDonald Managing Director & Company Secretary Technico Pty Limited CAN 063 602 782

5. From a perusal of the aforesaid Promissory Note reveals that the loan amount has been given in AUD 500,000 by the assessee and in terms of the loan agreement dated 24.08.2007 and the AE Technico Pty. Ltd. a company incorporated under the law of Australia promised to repay the assessee company on or before 22nd August, 2010 the said loan amount of AUD 500,000 together with interest which clearly reveals that the assessee has given loan of AUD 500,000 to Technico Pty. Ltd. and the said loan amount of AUD 500,000 together with interest, if any need to be paid back to the assessee in AUD 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 arms 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 Honble 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 ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 5 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 currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether http://www.itatonline.org ITA No. 233/2014 Page 29 of 34 the level of interest rates in the lenders State or that in the borrowers is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate 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 ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 6 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 the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. Likewise, the Honble High Court of Bombay in CIT Vs. the Great Eastern Shipping Co. Ltd. in ITA No. 1455 of 2014 dated 28.06.2017 has upheld the action of the Tribunal wherein it was held that arms length price in the case of loans advanced to AE would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. In the light of the aforesaid decisions of the Honble Delhi High Court as well as Honble Bombay High Court, the action of the assessee in adopting the bank rate prevailing in Australia is correct and the AO erred in adopting the Indian bank rate. The loan amount was given in Australian currency and as per the promissory note the AE has to return the amount in Australian Dollar. Therefore, applying the ratio laid by the Honble High Courts discussed above, we hold that there was no necessity of any arms length adjustment in this case and, therefore, we direct the deletion of the addition made on this count. Ground of appeal of assessee in respect to Transfer Pricing raised by it is allowed. We adopt the above detailed reasoning mutatis mutandis to hold that learned lower authorities have erred in going by the penal interest stipulation in the loan agreement than the corresponding interest benchmark in the overseas ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 7 market. We go by judicial consistency and delete the impugned identical transfer pricing adjustment(s) of 8,19,134/- & 6,27,062/- under challenge.

3. Next comes the assessees second substantive grievance challenging u/s. 14A r.w.s. Rule 8D disallowance(s) of 98,47,788/- and 34,79,136/-; assessment year-wise; respectively. The assessee had derived exempt income from dividends and mutual funds amounting to 186,100,400/- and 167,439,252/-; assessment year-wise respectively. It had made suo motu corresponding disallowances of 31,392/- and 1,65,198/-. The Assessing Officer invoked Rule 8D(2)(iii) administrative expenditure disallowance of 120,31,315/- and 120,99,174/-; respectively excluding the above suo motu figure(s). The CIT(A)s identical detailed discussion directs the Assessing Officer to exclude the assessees strategic investments for the proposed of computing the impugned disallowances. He further observes that the assessees investments not yielding any exempt income have also to be excluded in consequential computations.

4. It emerges during the course that very issue had arisen between the parties in assessment year 2009-10 as well (supra) which stood restored back to the Assessing Officer for afresh computation after taking note of hon'ble apex courts judgment.

5. Learned senior counsels only contention during the course of hearing is that although the CIT(A) has rightly granted relief to the assessee on the foregoing twin counts (supra) which have attained finality since the department has not come in appeal, it needs to be emphasized that we are dealing with an indirect head of expenditure which has to be apportioned between that incurred for business purposes and in deriving exempt income as per hon'ble apex courts above stated decision. His further case is that going by the very apportionment formula, this tribunals yet another co- ordinate benchs decision in Maruti Traders & Investors vs. ACIT, Circle-31, ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 8 Kolkata in ITA No.846/Kol/2017 & ITA No.637/Kol/2018 for assessment year 2013-14 (after insertion of Rule 8D from assessment year 2008-09 onwards) has held that proportionate allocation of exempt incomes / total turnover deserves to be adopted for the purpose of computing administrative expenditure under the Rule 8D(2)(iii). The Revenues case on the other hand is that the Assessing Officer had rightly invoked the impugned disallowance going by the statutory formula and also that the very issue in assessment year 2009-10 is pending yet taxpayer.

6. We have given our thoughtful consideration and foregoing rival pleadings. Suffice to say, it has already come on record that the impugned sec. 14A r.w.s. 8D disallowance has to be computed going by apportionment formula by determining the expenditure incurred for deriving business as well as exempt income. We therefore deem it appropriate to restore the instant administrative expenditure disallowance issue back to the Assessing Officer for computation of administrative expenditure disallowance going by the proportionate formula as per this tribunals co-ordinate benchs decision (supra). We reiterate that we are dealing with an indirect head of expenditure which cannot be strictly apportioned between regular business activities and for deriving exempt income. We accordingly accept assessees instant identical grievance raised in both assessment year(s) for statistical purposes in above terms.

7. Lastly comes the assessees identical additional ground seeking to allow education cess and secondary higher education cess u/s 40(a)(ii) r.w.s. 37(1) of the Act. It is vehemently contended at the Revenues behest that the additional ground does not deserve to be admitted at this belated stage. And more so when the relevant facts do not form part of the records. We find no merit in Revenues instant technical argument. The fact remain hon'ble apex courts landmark decision in National Thermal Power Corporation. Ltd. vs. Commissioner of Income-tax (1998) 229 ITR 383 (SC) considered in tribunals special bench order in All Cargo Global Logistics Ltd. vs. DCIT (2012) 137 ITD

26 (Mum) holds that we can very well entertain such an additional ground in ITA No.33/Kol/2018 & 1090/Kol/17 A.Ys. 10-11 & 11-12 Rusell Credit Ltd. Vs. Addl.CIT-Rg-8/DCIT-Cir-8, Kol. Page 9 order to determine correct tax liability of a taxpayer provided all the relevant facts are already on record. Going by the very analogy, we admit the assessees instant additional ground. We further note that the assessees corresponding sums of education and higher education cess involved assessment year-wise figures of 18,85,062 and 6,67,018/-; respectively. Hon'ble Rajasthan high courts judgment in D.B. Tax Appeal No. 52 of 2018 Chembal Fertilizers & Chemicals Ltd. holds that the relevant statutory provision to this effect as well as the CBDTs Circular issued way back on 18.05.1967 do not include Cess. Learned co-ordinate benchs decision in ITC Ltd. case ITA No.685/Kol/2014 dated 27.11.2018 also decided the very issue in assessees favour. We therefore decline the Revenues arguments supporting the impugned disallowance and direct the Assessing Officer to grant necessary relief to the assessee. This identical third substantive grievance raised in both appeal(s) is accepted.

8. These two assessees appeal(s) are partly in above terms. Order pronounced in the open court 17/01/2020 Sd/- Sd/- ( ) () ) ( A.L.Saini) (S.S.Godara) (Accountant Member) (Judicial Member) Kolkata, *Dkp *- 17/01/2020 / Copy of Order Forwarded to:-

1. /Assessee-Russell Credit Ltd., 37,J.L. Nehru Road, Kolkata-71

2. /Revenue-Addl-CIT, Range-8/DCIT Cir-8, P-7, Chowringhee Sq. Kolkata-69

3. 5 6 / Concerned CIT Kolkata

4. 6- / CIT (A) Kolkata

5. 9 ))5, 5, / DR, ITAT, Kolkata

Russell Credit Limited, Kolkata v. DCIT, Circle-8, Kolkata, Kolkata

Concise Analytical Summary of the Tribunal Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

1. Transfer Pricing / Notional Interest

2. Section 14A read with Rule 8D Disallowance

3. Admission and Merits of the Additional Ground (Education Cess and Secondary Higher Education Cess)

Holding and Implications

Russell Credit Limited, Kolkata v. DCIT, Circle-8, Kolkata, Kolkata

Comments