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3. We have heard rival submissions and perused the materials available on record. We find that assessee is engaged in the business of cutting and polishing rough diamonds and export of cut and polished diamonds. The assessee had given interest free loan of USD 13,50,000/- equivalent to INR 9,84,41,500/-to its wholly owned subsidiary Tai Shan Gems Ltd., (Hong Kong) which is an associated enterprise of the assessee (AE in short). The assessee stated that this loan is part of capital funding of the subsidiary. The assessee had not charged any interest on the said loan. The assessee also stated that the said loan transaction cannot be considered as international transaction within the meaning of Section 92B of the Act. The ld. TPO ignored this contention and show-caused the assessee as to why arm's length price of the interest receivable from AE on the loan given by the assessee during the year should not be benchmarked using LIBOR plus rates converted to fixed rate interest SWAP as per Bloomberg data base. The ld. TPO accordingly made a search for comparables of Bloomberg data base by using the following criteria:-

i) Loans of the same current year in which loan given by assessee.

ii) Loans pertaining to the financial year in which loan given to AE

iii) Loans pertaining to the country where loan has been given to the AE by assessee

iv) Unsecured loans (as loan given to AE by assessee is also unsecured)

3.1. The ld. TPO observed that the average loan spread of the comparable selected from the data given on the above criterion is then used for fixing the same into a fixed rate of interest as would have been

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done in third party unrelated transaction. For doing this, the average spread data of the comparable loans is fed into a SWAP Manager application of the Bloomberg data base which converts the average spread into a fixed coupon rate of interest. Accordingly, the ld. TPO arrived at the notional interest rate of 3.52% i.e. LIBOR 1.52% plus spread of 2% and applied the same on the loans given by the assessee to AE and made an upward adjustment to arm's length price towards notional interest income of Rs.16,32,966/- on the loan given to AE. The assessee submitted that in order to provide capital to wholly owned subsidiary, it had split the transaction into capital and interest free loan. The assessee has submitted that since this transaction is on capital account, same would not fall in the nature of international transaction within the meaning of Section 92B of the Act. It was also pleaded that the entire transaction has been duly approved by the Reserve Bank of India. The assessee also pleaded that it had sufficient own funds than the total amounts invested in subsidiary company including the interest free loan given thereon. Accordingly, it was argued that the upward adjustment to ALP made on the account of notional interest income is bad in law. The ld. CIT(A) did not heed to the contentions of the assessee and upheld the addition made on account of notional interest income at LIBOR plus Spread rate of 3.52% per annum.

4. Aggrieved assessee is in appeal before us.

5. The. Ld. AR stated that interest free loan given to wholly owned subsidiary by the assessee is a shareholder activity and hence, does not fall within the ambit of international transaction within the meaning of Section 92B of the Act. However, he fairly stated that this aspect of the issue had been dismissed by this Tribunal in assessee's own case for

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A.Y.2014-15 in ITA No.1724/Mum/2019 dated 16/02/2021. With respect to addition made on account of notional interest, he drew our attention to para 7 of the said Tribunal order for A.Y.2014-15 wherein this Tribunal had held that only LIBOR rate should be considered for the purpose of making transfer pricing adjustment on account of interest free loan given to wholly owned subsidiary.

5.1. Per contra, the ld. DR argued that naked LIBOR rate alone cannot be adopted as the same does not consider risk adjustments. He even stated that six months average of LIBOR rates for March 2013 worked out to 0.049% and on that the spread to be considered for the purpose of risk adjustments, even if it is considered at 4%, the total notional interest income ought to have been added by the ld. TPO would be 4.049%. In the instant case, the ld. TPO was very liberal in applying rate of interest @ 3.52%.

6. We find that the ld. DR in his argument was not able to point out any error in the order passed by this Tribunal for A.Y.2014-15. He merely pointed out by making a fresh argument that naked LIBOR alone cannot be adopted. We also find that the Hon'ble Rajasthan High Court in the case of CIT vs. Vaibhav Gems Ltd., reported in 88 Taxmann.com 12 which was heavily relied upon by the ld. AR had addressed the issue in dispute before us and held that only LIBOR rate should be taken for the purpose of adding notional interest income on account of interest free loan given to foreign subsidiary. We further find that the special leave petition preferred by the Revenue before the Hon'ble Apex Court against this judgement has been dismissed by the Hon'ble Apex Court which is reported in 259 Taxmann 130 (SC). When the issue is already covered in assessee's own case by the order of this Tribunal in subsequent year i.e.

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A.Y.2014-15 on the very same interest free loan transaction given to AE, there is no need to take a divergent view by this Tribunal for the year under consideration. We find that this Tribunal in A.Y.2014-15 had held as under:-

"7. We have considered rival submissions and perused materials on record. Though, learned Counsel for the assessee has submitted that advancing of interest free loans to the subsidiaries is a shareholder's activity, hence, should not be subjected to arm's length price determination, however, we are not convinced. A perusal of Explanation-I(c) of section 92B of the Act makes it clear that capital financing including any type of long term and short term borrowing, lending, etc., comes within the ambit of international transaction. Since, the assessee has provided interest free loan to the AEs, which, under similar circumstances would not have been provided to unrelated parties, arm's length interest has to be determined. It is further observed, in the course of proceedings before the first appellate authority the assessee relying upon various judicial precedents had submitted that arm's length interest should be determined by applying LIBOR rate. Since, learned Commissioner (Appeals) has accepted the aforesaid contention of the assessee, we do not find any infirmity in the decision of learned Commissioner (Appeals). This ground is dismissed."

6.1. Respectfully following the same, we direct the ld. TPO to consider only LIBOR rate @1.52% as arm's length price for benchmarking the interest free loan given by the assessee to its AE and recompute the transfer pricing adjustment accordingly. Accordingly, the ground No.1 raised by the assessee is partly allowed.

7. Ground No.2 raised by the assessee is with regard to transfer pricing adjustment made on account of fee for corporate guarantee.

8. We have heard rival submissions and perused the material available on record. We find that assessee has given corporate guarantee during the year on behalf of its AE in favour of Barclays Bank PLC on 02/04/2012 for an amount of USD 7500000, on the strength of which, the AE had taken loan from Barclays Bank. The assessee has not charged any

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commission / fees for issue of such guarantee for the benefit of the AE. The ld. TPO determined fee / commission for corporate guarantee at 2.25% and arrived at the transfer pricing adjustment figure of Rs.93,35,250/-. In appellate proceedings, the ld. CIT(A) directed the ld. AO to determine the commission on corporate guarantee at 0.5% on the loans availed.

8.1. The ld. DR placed reliance on the decision of Co-ordinate Bench of Mumbai Tribunal in the case of Mahindra and Mahindra Ltd., and other Tribunal decisions in the case of Technimont JCB India Ltd., to support the order of the ld. TPO. We find that appeal of the Revenue against the order of the ld. CIT(A) for the year under consideration had been dismissed due to low tax effect. Hence we hold that the ld. DR before us cannot argue for determination of rate of commission beyond 0.5% as was held by the ld. CIT(A). We find that this issue is also already considered by this Tribunal in assessee's own case for A.Y.2014-15 in ITA No.1724/Mum/2019 dated 16/02/221 wherein it was held as under:-

"13. We have considered rival submissions in the light of decision relied upon and perused material on record. As far as the contention of learned Counsel for the assessee that provision of corporate guarantee is not an international transaction, we are not convinced with it. A reading of Explanation-l(c) of section 92B of the Act, makes it clear that the provision of any kind of guarantee will come within the ambit of international transaction under section 92B of the Act. Further, as rightly observed by learned first appellate authority, the Tribunal, Mumbai Bench, in Everest Kanto Cylinders Ltd. v/s DCIT, [2013] 34 Taxman.com 19 (Mum.) while negating identical contention made by the assessee has held that provision of corporate guarantee is an international transaction. The aforesaid decision of the Co-ordinate Bench has also been upheld by the Hon'ble Jurisdictional High Court in case of the same assessee as reported in [2015] 58 Taxman.com 254 (Bom.). That being the case, we do not find any merit in the submissions of the assessee that provision of corporate guarantee is not an international transaction. As regard the arm's length rate of fee/commission, the learned Counsel for the assessee relying decision of the Asian Paints India Ltd. (supra) has submitted that it should be reduced to 0.2%. However, on careful perusal of the decision rendered in case of Asian Paints (supra), we find that in the facts of the said case the assessee itself had charged

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commission @ 0.2% over the years and the Tribunal has accepted the claim of the assessee which was not contested by the Revenue. Taking note of these facts the Hon'ble Jurisdictional High Court has dismissed the appeal of the Revenue. These are not the facts in case of the present assessee. Therefore, we are not inclined to interfere with the decision of learned Commissioner (Appeals) on this issue. This ground is dismissed."

8.2. Since we find that the ld. CIT(A) had relied on the decision of the Hon'ble Jurisdictional High Court while deciding this issue, we find no infirmity in the said order of the ld. CIT(A). Accordingly, the ground No.2 raised by the assessee is partly allowed.

9. The ground No.3 raised by the assessee is challenging disallowance made on account of alleged non-genuine purchases.

10. We have heard rival submissions and perused the materials available on record. In the course of assessment proceedings, the ld. AO noticed that some of the purchases shown by the assessee from the following parties were part of Rajendra Jain group:-

10.1. The ld. AO observed that in the course of search and seizure action conducted u/s 132 of the Act in the case of Rajendra Jain group, it was found that the said group through various entities was providing

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accommodation entries by way of bogus purchase bills. On the basis of said information, the ld. AO called upon the assessee to prove the genuineness of purchases aggregating Rs.4,7,41,361/-. In response to the said query, the assessee furnished the following documents before the ld. AO:-

1. Ledger accounts of parties referred to in your notice

2. Purchase invoices confirming purchases of cut and polished diamonds

3. Bank statements reflecting payments made for the purchases

4. Extracts of Stock records to substantiate receipt of goods and corresponding sales

5. Sales invoices with relevant bank statements confirming receipt of sale proceeds into bank accounts of the assessee

6. Statement giving details of Cut and Polished diamonds purchased from alleged parties together with its subsequent movement with reference to sales

10.2. Accordingly, the assessee pleaded that transactions of purchase made from the aforesaid suppliers are genuine. The ld. AO in para 5.6 of his order had noted that inspite of specific opportunities given to the assessee, the assessee had not produced the parties to prove the genuineness of the purchases made by the assessee. The ld. AO concluded that these parties are non-existent and never supplied any material to the assessee and therefore, purchases made from the said parties cannot be held to be genuine. The ld. AO observed that since, assessee had maintained the stock register showing the purchases made together with the corresponding sales made thereof with quantitative details, it could have made purchases in the grey market and accordingly, only the profit element embedded in the said purchase transaction could

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be brought to tax. The ld. AO accordingly, estimated the profit percentage which should be brought to tax at 5% and made addition of Rs.23,52,068/-(Rs.4,70,41,361 x 5%) in the assessment. This addition was upheld by the ld. CIT(A). Before us, the ld. AR pointed out that all the requisite documents were duly furnished by the assessee before the ld. AO which are also listed in page 8 of the assessment order. The ld. AO did not find any defects in the said documents. The ld. AR argued that the ld. AO did not resort to issue any notice u/s.133(6) of the Act of these suppliers though it has been mentioned by him incorrectly in the assessment order. This fact was sought to be verified from the assessment records and the ld. DR, who was in possession of the assessment records at the time of virtual hearing, fairly submitted that no notice u/s.133(6) of the Act issued to any suppliers is available in the assessment records. Hence, it could be safely concluded that the ld. AO after receipt of various documents from the assessee had not resorted to make any verification by issuing notice u/s.133(6) of the Act to the concerned suppliers. We also find that assessee had not furnished any confirmation from the said suppliers while furnishing the various documents. All the documents furnished by the assessee are only self- serving documents which are available in the books of accounts of the assessee company and which are not corroborated by third party confirmation. Even the assessee had failed to produce parties for examination as directed by the ld. AO. In these circumstances, it would be just and fair to conclude that the purchases made from the aforesaid suppliers remain unverifiable. But since, the corresponding sales made out of disputed purchases had not been doubted by the Revenue, it would be safe to conclude that assessee could have made purchases from grey market in order to have some savings in indirect taxes and the incidental profit element thereon for making purchases in cash. Based on

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the report of the task group for diamond sector published by the Government of India, Ministry of Commerce and Industry in this regard, wherein the benign / presumptive taxation threshold was set at 2.5%, we hold that profit percentage embedded in the value of disputed purchases estimated at 2.5% thereon would meet the ends of justice. The ld. AO is directed accordingly. Hence, ground No.3 raised by the assessee is partly allowed.

11. Ground No.4 raised by the assessee is challenging the disallowance made u/s.14A of the Act r.w.Rule 8D(2)(iii) of the Income Tax Rules (hereinafter referred to as Rules).

12. We have heard rival submissions and perused materials available on record. We find that assessee had derived dividend income of Rs.94,89,166/- and claimed the same as exempt in the return of income. The break-up of dividend received are as under:-

Diamond India Ltd., - Rs. 83,890/-

The Ratnakar Bank Ltd., - Rs. 9,32,346/-

Inter Gold (India) Pvt. Ltd., - Rs.84,72,930/-

===============

Total Rs.94,89,166/-

==============

12.1. The assessee made suomoto disallowance of administrative expenses in the sum of Rs.1 lakh u/s.14A of the Act in the return of income. The assessee submitted before the ld. AO that all the investments were made in its subsidiary companies for business purposes and hence, no disallowance of expenses is required to be made. It was submitted that in any case, the disallowance made by the assessee voluntarily in the sum of Rs.1,00,000/- would be more than sufficient considering the facts of the case. The assessee also pleaded before the

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ld. AO that it had sufficient interest free funds for making the entire investments and hence, no disallowance of interest is called for. The assessee also pleaded that no investment was made during the year under consideration. The ld. AO simply disregarded the entire contentions of the assessee and proceeded to hold that management of investments involves magnitude and monitoring which in turn necessitates expenditure in terms of man hours and administrative expenditure like telephone, postage, office expenses etc., other than expenditure directly related thereto. He observed that it is an irrefutable fact that up keeping of maintenance of any investment portfolio for earning of income necessitates expenditure on supportive office and other infrastructure facilities apart from financial cost on the funds deployed. With these observations, the ld. AO proceeded to make disallowance under second and third limb of Rule 8D(2) of Rules as under:-

Under Rule 8D(2)(ii) - Rs.30,40,255/-

Under Rule 8D(2)(iii) - Rs.64,28,769/-

===========

Total Rs.94,69,024/- ==========

12.2. We find that the ld. CIT(A) duly accepted the contentions of the assessee that assessee is having sufficient interest free funds in its kitty and hence, no disallowance of interest under Rule 8D(2)(ii) of the Rules is warranted. With regard to disallowance made under Rule 8D(2)(iii) of the Rules, the ld. CIT(A) upheld the disallowance made by the ld. AO with slight modification by giving a direction to the ld. AO to reduce the sum of Rs.1,00,000/- voluntarily disallowed by the assessee u/s.14A of the Act.

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12.3. We find that assessee has made investments in the following entities which, had fetched dividend income / had not fetched dividend income, as the case may be:-

12.3. The ld. AR argued before us that no objective satisfaction was recorded by the ld. AO for disregarding the claim of the assessee. We find that assessee had only made an adhoc disallowance of Rs. 1 lakh in the instant case u/s.14A of the Act and had also not provided the basis of arriving at such disallowance before the lower authorities. Hence, there is no need to record any satisfaction by the ld. AO to disapprove the said adhoc disallowance. The ld. AO had proceeded to make the disallowance based on computation mechanism provided under Rule 8D (2)(iii) of the Rules, which action cannot be faulted with. The only dispute before us is with regard to disallowance made under Rule 8D(2)(iii) of the Rules. We

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find that the Hon'ble Special Bench of Delhi Tribunal in the case of ACIT vs. Vireet Investments reported in 165 ITD 27 had held that only those investments which had yielded exempt income to the assessee during the year alone should be considered for the purpose of making the disallowance under Rule 8D(2)(iii) of the Rules. Respectfully following the same, we hereby direct the ld. AO to consider only the investments of Rs.40,01,64,994/- and apply 0.5% thereon for the purpose of working out the disallowance under Rule 8D(2)(iii) of the Rules which would work out to Rs.20,00,825/-. The ld. AO is directed to disallow a sum of Rs.19,00,825/- ( 20,00,825- 1,00,000) in the instant case u/s.14A of the Act read with Rule 8D(2)(iii) of the Rules. Accordingly, the ground No.4 raised by the assessee is partly allowed.

13. Ground No.5 is raised by the assessee is general in nature and does not require any specific adjudication.

14. In the result, appeal of the assessee is partly allowed. Order pronounced on 23/07/2021 by way of proper mentioning in the notice board.

Sd/- Sd/-

(VIKAS AWASTHY) (M.BALAGANESH)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai; Dated 23/07/2021 KARUNA, sr.ps

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Copy of the Order forwarded to :

1. The Appellant

2. The Respondent.

3. The CIT(A), Mumbai.

4. CIT

5. DR, ITAT, Mumbai

6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar)

ITAT, Mumbai