Archean Industries P Ltd., CHENNAI V. DCIT Corporate Circle 1(1), CHENNAI

ITTPA 37/CHNY/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0311 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 18-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 07-09-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 06-09-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Earning of tax free income; Wholly owned subsidiary; Notional interest; Commercial expediency; TDS; Rule 8D; Set aside
• Section: 14A; 40(a)(ia); 250; 113; 194A; 73; 13; 22

Judgement Text

आयकर अपील सं./IT (TP) A No.37/Chny/2018 िनधा रणवष /Assessment Year: 2014-15 M/s.Archean Industries Pvt. Ltd., No.2, North Crescent Road, T.Nagar, Chennai. v. The Dy. Commissioner – of Income Tax, Corporate Circle-1(1), Chennai. [PAN:AAACA 7344 J] (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/ Appellant by : Mr.S.Sridhar, Adv. यथ क ओर से /Respondent by : Dr.S.Palanikumar, CIT सुनवाईक तारीख/Date of Hearing : 08.09.2022 घोषणाक तारीख /Date of Pronouncement : 19.10.2022 आदेश / O R D E R PER MANJUNATHA.G, AM: This appeal filed by the assessee is directed against final assessment order passed by the AO u/s.143(3) r.w.s.144C of the Income Tax Act, 1961, dated 09.08.2018, in pursuant to directions of the Dispute Resolution Panel-2, Bangalore, u/s.144C(5) of the Act, dated 27.06.2018 and pertains to assessment year 2014-15. 2. The assessee has raised the following grounds of appeal: 1. The order of The Deputy Commissioner of Income Tax, Corporate Circle- 1(1), Chennai dated 09.08.2018 read with the order of the DRP-2, Bangalore dated 27.06.2018 for the above assessment year is contrary to law, facts, and in the circumstances of the case. आयकर अपीलीय अिधकरण,’डी’ यायपीठ, चे ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI ी वी. दुगा राव, माननीय ाियक सद एवं ी जी. मंजूनाथा, माननीय लेखा सद के सम BEFORE SHRI V. DURGA RAO, HON’BLEJUDICIAL MEMBER AND SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 2 :: 2. The DCIT/DRP erred in making upward adjustment of Rs.8,24,34,8865/- towards corporate guarantee chargeable in consequence to the order of the TPO dated 31.10.2017 passed under TP regime in the computation of taxable total income without assigning proper reasons and justification. 3. The DCIT/DRP failed to appreciate that the upward adjustment resulting in addition in this regard to the computation of taxable total income was wrong, erroneous, unjustified, incorrect and not sustainable in law. 4. The DCIT/DRP failed to appreciate that the business prudence and commercial necessities resulted in giving corporate guarantee in favour of the consortium of the banks pertaining to the financial facility availed by the subsidiary, M/s.Senfer Investments Ltd., Cyprus, would negate the presumption of the benefit in the form of corporate guarantee commission for making the upward adjustment in the computation of taxable total income. 5. The DCIT/DRP failed to appreciate that the issues raised from Page No.5 to Page No.19 of the submission on this issue before the DRP were not considered in proper perspective from para 4.5 to para 4.6 of their order dated 27.06.2018, mechanically adopted in the impugned order and ought to have appreciated that the technical issues and the issues raised on merits including wrong judicial analysis would vitiate the upward addition in the computation of taxable total income. 6. The DCIT/DRP erred in making an upward adjustment of Rs.6,19,18,843/- towards interest chargeable to the AE in consequence to the order of the TPO dated 31.10.2017 passed under TP regime in the computation of taxable total income without assigning proper reasons and justification. 7. The OCIT/DRP failed to appreciate that the financial assistance to the subsidiaries/AEs was out of the non-interest bearing funds and in any event ought to have appreciated that the transaction of extending financial assistance to the AEs could not be categorized as diversion of the interest bearing funds for non-business purposes thereby vitiating the upward adjustment/addition in the computation of taxable total income. 8. The DCIT/DRP failed to appreciate that the issues raised from Page No.21 to Page No.24 of the submission on this issue before the DRP were not considered in proper perspective in para 5.4 of their order dated 27.06.2018, mechanically adopted in the impugned order and ought to have appreciated that the technical issues and the issues raised on merits including wrong judicial analysis would vitiate the upward addition in the computation of taxable total income. 9. The DCIT/DRP ought to have appreciated that the quantification of the guarantee commission and charging of notional interest were wrong, erroneous, unjustified, incorrect and not sustainable in law and further ought to have appreciated that the entire quantification process adopted would defy the well settled principles on the said issue under transfer pricing regime, thereby vitiating the related findings in para 6.1 of theirorder dated 27.06.2018. 10. The DCIT/DRP erred in making the disallowance of Rs.1,03,95,704/-, for want of TDS u/s 194A of the Act on the application of section 40(a)(ia) of the Act and consequently erred in adding back such sum in the computation of taxable total income without assigning proper reasons andjustification. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 3 :: 11. The DCIT/DRP failed to appreciate that the conclusion reached in equating the bill discounting charges with interest on the misconstruction of the provisions in section 2(28A) of the Act was wrong, erroneous, unjustified, incorrect and not sustainable in law. 12. The DCIT/DRP went wrong in recording the findings in this regard in para 7.1.2 of their order dated 27.06.2018 without assigning proper reasons and justification and ought to have appreciated that the second proviso below section 40(a)(ia) of the Act would negate the said notional disallowance resulting in addition while further vitiating the technical stand taken in view of the powers vested in them statutorily to consider alternate claim/stand. 13. The DCIT/DRP failed to appreciate that the issues raised on the said addition from Page No.38 & Page No.39 of the submission filed before them were not considered in proper perspective while taking shelter wrongly on technicalities, thereby vitiating the addition made in the computation of taxable total income. 14. The DCIT/DRP erred in making the disallowance of notional expenses aggregating to Rs.2,01 ,64,577/- on the application of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 and consequently erred in adding back such sum in the computation of taxable total income without assigning proper reasons and justification. 15. The DCIT/DRP failed to appreciate that the provisions of section 14A of the Act had no application to the facts of the case and ought to have appreciated that in the absence of recording necessary satisfaction on the incurring of expenses for earning tax free income of Rs.28,438/-, the consequential quantification of notional expenses as per Rule 8D of the Income Tax Rules, 1962 was wrong, erroneous, unjustified, incorrect and not sustainable in law. 16. The DCIT/DRP failed to appreciate that the issues raised in this regard from Page No.30 to Page No.33 of the submission filed/given in writing before them were not considered in proper perspective and ought to have appreciated that the judicial trend on this issue on various facets wascompletely ignored and brushed aside. 17. The DCIT/DRP failed to appreciate that the quantification of notional expenses as per Rule 8D of the Income Tax Rules, 1962 on various facets was wrong, erroneous, unjustified, incorrect and not sustainable in law. 18. The DCIT/DRP erred in disallowing Rs.3,87,429/- being the interest on income tax and consequently erred in adding back such sum in the computation of taxable total income without assigning proper reasons and justification. 19. The DCIT/DRP failed to appreciate that the issues raised in this regard before them in Page No.40 & Page No.41 were completely ignored and brushed aside thereby vitiating the addition completely. 20. The DCIT/DRP failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles of natural justice would be nullity in law. 21. The Appellant craves leave to file additional grounds/arguments time of hearing. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 4 :: 3. The brief facts of the case are that the assessee company is engaged in the business of export of rough granite stones filed its return of income for the AY 2014-15 on 31.03.2015 admitting a total income of Rs.1,18,80,541/-. The case has been selected for scrutiny and during the course of assessment proceedings, a reference was made to the TPO to determine ALP of international transaction entered into by the assessee with its AEs. The TPO vide their order dated 31.10.2017 u/s.92CA of the Act, suggested upward adjustment towards corporate guarantee given by the assessee to its AEs amounting to Rs.8,24,34,885/- and also suggested an upward adjustment of Rs.6,19,18,843/- towards interest free loans given to AEs. In pursuant to TP adjustment as suggested by the TPO, the AO has passed draft assessment order u/s.143(3) r.w.s.92CA of the Act, and proposed TP adjustment as suggested by the TPO towards corporate guarantee fees and interest on loans given to AE. The AO had also proposed additions towards bill discounting charges u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.194A of the Act. Similarly, the AO has made addition towards disallowance u/s.14A r.w.s.8D of the Rules, amounting to Rs.2,21,90,340/-. 4. Being aggrieved by the draft assessment order, the assessee has filed objection before the DRP-2, Bangalore, and contended additions proposed by the AO towards TP adjustment on account of corporate guarantee fee and interest receivables on loans extended to AE. The assessee had also challenged additions towards disallowance of IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 5 :: discounting charges u/s.40(a)(ia) of the Act and 14A disallowances. The DRP vide order dated 27.06.2018, u/s.144C(5) of the Act, uphold the additions made by the AO towards corporate guarantee fee receivable from AE for providing corporate guarantee and also interest receivables on loans extended to subsidiary. The DRP had also upheld the addition proposed towards disallowance on bill discounting charges u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.194A of the Act and also disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962. However, deleted the additions made by the AO towards disallowance of employee’s contribution towards PF & ESI u/s.36(1)(va) of the Act. In pursuant to directions of the DRP, the AO has passed final assessment order u/s.143(3) r.w.s.144C of the Act, on 09.08.2018 and determined total income at Rs.18,71,81,979/- after making additions towards TP adjustment as suggested by the TPO, disallowance u/s.40(a)(ia) of the Act, disallowance u/s.14A r.w.r.8D of IT Rules, and disallowance of interest on Income Tax. Aggrieved by the final assessment order, the assessee preferred an appeal before us. 5. The first issue that came up for our consideration from Ground Nos.2-5 of the assessee’s appeal is TP adjustment towards corporate guarantee commission amounting to Rs.8,24,34,885/-. The facts with regard to the impugned dispute are that the assessee has issued corporate guarantee to the extent of USD 65 million in favour of IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 6 :: consortium of Axis Bank Ltd., and Bank of India, London, in the year 2009, to facilitate its AEs to take term loans amounting to USD 75 million borrowed by its subsidiary M/s. Senfer Investments Ltd., Cyprus. M/s. Senfer Investments Ltd., Cyprus, a subsidiary of Assessee Company incurred huge loss and the entire net worth was wiped out. The assessee had operations outside India and insolvency of its subsidiary would affect the international operations and thus, the assessee has decided to extend corporate guarantee to its subsidiary to avail term loan facility. There was a tri-party agreement between the assessee and M/s. Senfer Investments Ltd., Cyprus, a subsidiary company of the assessee and the lending banks, as per which, no monetary benefit should be payable to guarantor. Therefore, the assessee had not charged any commission on corporate guarantee given to banks on behalf of its subsidiary company. The TPO/AO has imputed corporate guarantee fees @ 2.19% on total corporate guarantee outstanding at the end of the year on the basis of commission charged by commercial banks and made TP adjustment of Rs.8,24,34,885/-. 5.1 The Ld.AR for the assessee submitted that although, the assessee is not disputed with regard to the fact that corporate guarantee given to banks on behalf of its AEs, is an international transaction, but no commission was charged, because of contractual obligations with lending banks. The assessee had entered into an agreement with lender Banks IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 7 :: and as per said arrangement, there was a tri-party agreement between the assessee, its subsidiary M/s.Senfer Investments Ltd., Cyprus, and Axis Bank Ltd., Singapore Branch and Bank of India and as per said agreement, there is a restriction for payment of any kind of monetary benefit including commission to the guarantor. Therefore, as a prudent businessman, the assessee does not charge any commission. However, the AO as well as the DRP without appreciating the facts simply charged notional commission on corporate guarantee given by the assessee to its AEs. 5.2 The Ld.DR, on the other hand, supporting the order of the DRP submitted that there is no dispute with regard to the fact that corporate guarantee given to AEs is an international transaction, more particularly, after the amendment brought in by Finance Act, 2012 to the definition of international transaction as defined u/s.92B of the Act. Therefore, whether or not any conditions, the assessee need to bench mark its transactions with the AEs. Therefore, the TPO has rightly charged commission receivable from AE on corporate guarantee. As regards, the arguments of the assessee that there are certain restricting covenant placed by the bank on the guarantor from charging any commission without bank prior consent, the DRP negated the arguments of the assessee that if at all there is a restriction, the assessee could have obtained permission from the banks to charge commission and thus, merely for the reason that there is a restriction, the assessee cannot IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 8 :: extend corporate guarantee to its AE without charging any commission, because, guarantee given by the assessee to banks on behalf of its subsidiary, has a financial implication and thus, the TPO has rightly imputed commission and their orders should be upheld. 5.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Although, the assessee contended that corporate guarantee given to lenders on behalf of subsidiary per se is not an international transaction, but we reject the arguments of the assessee for the simple reason that after amendment to sec.92B of the Act, by the Finance Act, 2012, “corporate guarantee were brought under the scope of the term ‘international transaction’ with retrospective effect from 01.04.2002”. Further, various decisions of Courts including the decision of the Hon’ble Madras High Court in the case of PCIT v. Redington (India) Ltd., reported in [2021] 430 ITR 298 (Madras) clearly held that corporate guarantee is an international transaction and the same needs to be bench marked to determine ALP of transaction. Therefore, we are of the considered view that corporate guarantee given by the assessee on behalf of its subsidiary to lender Banks to facilitate the subsidiary to avail term loans is an international transaction. 5.4 Having said so, let us examine whether charging commission is mandatory in the given facts and circumstances of the case. Admittedly, IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 9 :: the assessee has not charged any commission on corporate guarantee given to banker on behalf of its subsidiary. As per the claim of the assessee, there is a restricting covenant placed by the bank on the guarantor from charging any commission without bank prior consent and as per said restriction, the assessee shall not take any kind of monetary benefit for providing corporate guarantee on behalf of its AE. We find that there is a tri-party agreement between the assessee and its subsidiary and lending bankers and as per the said tri-party agreement Clause-20, there is a restricting covenant from the lender banks for not charging any kind of monetary benefit including commission on corporate guarantee extended by the assessee on behalf of its subsidiary. Therefore, once there is tri-party agreement between the parties, then there will be a obligation on the assessee to honour the conditions of agreement and as per said agreement, the assessee cannot charge any commission on corporate guarantee given to bankers on behalf of its AEs. Further, the agreement between the parties is on the basis of need of the business and further, the Revenue cannot sit in arms chair of the businessman and decide how the business is to be conducted. In our considered view, a prudent decision taken in the normal course of business should be honoured by the tax authorities. In this case, there is a condition as to not charging commission on corporate guarantee given by the assessee to bankers and said condition is agreed between the parties in terms of tri-party agreement. In fact, the TPO as well as the IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 10 :: DRP never disputed the fact that there is a tri-party agreement between the parties and as per the said agreement there is restricting covenants for charging guarantee commission. But, although the Revenue has accepted the fact that there is a restriction for charging commission, but the TPO gone ahead to charge notional corporate guarantee fees on corporate guarantee extended by the assessee on behalf of its AE, even though, there is a clear condition in the agreement between the parties for non-charging the commission. Therefore, we are of the considered view that the TPO/DRP was erred in charging notional commission on corporate guarantee given by the assessee to lending bankers on behalf of its AEs. 5.5 Coming back to case laws cited by ld. DR. The ld. DR relied upon ITAT Mumbai Bench decision in the case of Siro Clinpharm (P) Ltd. v. ITO [2021] 131 taxmann.com 73 (Mumbai-Trib.). We find, in the said judgment the Tribunal held that corporate guarantee constitutes an international transaction u/s.92B of the Act. In our considered view, there is no dispute with regard to the findings of the Tribunal as well as various High Courts on the issue of defining corporate guarantee as international transaction, but when it comes to charging commission, facts of each case has to be examined. In the case before Mumbai Tribunal, the assessee itself has charged guarantee commission of 1.75% on corporate guarantee given to its AE and under those facts, the TPO/DRP examined the case of the assessee and bench marked the IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 11 :: transaction to impute 3% commission on guarantee given by the assessee. Therefore, under those facts, the Tribunal came to the conclusion that corporate guarantee constitutes an international transaction and same needs to be benchmarked. In case of the decision of jurisdictional high Court of Madras in the case of PCIT v. Redington (India) Ltd. (supra), we find that the Hon’ble jurisdictional High Court held that there is an inherent risk in providing guarantee and hence, adjustments are required to be made for guarantee commission. In our considered view, there is no dispute on ratio laid down by the Hon’ble High Courts, because, once a transaction between the assessee and its AE is an international transaction, the same needs to be bench marked to ascertain ALP of said transaction. In this case, on perusal of the facts available on record, we find that there is a restricting covenant from the bankers on the guarantor for charging guarantee commission and under these facts, we are of the considered view that the assessee has rightly not charged any commission on corporate guarantee given to bankers on behalf of its AEs. Therefore, we are of the considered view that the TPO/DRP were clearly erred in computing guarantee commission on corporate guarantee given by the assessee to its AEs. Hence, we direct the TPO to delete upward adjustment suggested towards corporate guarantee commission. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 12 :: 6. The next issue that came up for our consideration from Ground Nos.6-9 of the assessee’s appeal is notional interest charged on interest free loans extended to AE. During the financial year 2013-14 relevant to the AY 2014-15, the assessee had extended a loan of Rs.33,22,62,000/- to M/s. Senfer Investments Limited, Cyprus, a 100% subsidiary of assessee company. Apart from this, the assessee had also provided loan facility to its various subsidiaries in the earlier year and out of which, a sum of Rs.50,45,70,716/- as on 31.03.2014 was outstanding. The assessee has not charged any interest on loans advanced to its subsidiary on the ground that there is a commercial expediency in providing loans to subsidiary, because, the subsidiary companies are engaged in the business of investments also trading in similar products which benefitted the business of the assessee company. The TPO rejected the arguments of the assessee and computed notional interest on total outstanding loans given to subsidiaries by adopting 12 months average LIBOR rate plus 670 bps and made upward adjustment of Rs.6,19,18,843/-. 6.1 The Ld.AR for the assessee submitted that loans given to subsidiaries is for commercial purpose and the assessee has derived business advantage by extending loans to subsidiaries. Although, the TPO/DRP claimed that M/s. Senfer Investments Limited, Cyprus, is engaged in investment business, but the company is engaged in the business of investments in all group companies which are mainly engaged in trading in granites which is directly benefitted to the assessee IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 13 :: company. Therefore, the TPO erred in imputing interest on loans given to subsidiaries. The Ld.AR further contended that loans given to subsidiary companies is out of own funds which is evident from the fact that as on 31.03.2014, own funds in the form of share capital and reserves & surplus of the assessee company is at Rs.144.66 Crs., whereas the assessee has extended loans to subsidiary which was outstanding as on 31.03.2014 at Rs.83.68 Crs. Therefore, he submitted that where the assessee was having mixed funds comprising own funds and loan funds, a general presumption was drawn in favour of the assessee that interest free loans to AEs are out of own funds and thus, no interest can be computed on loans given to AE. In this regard, he relied upon the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd., [2019] 261 Taxman 165 (SC) and also the decision of the Hon’ble Delhi High Court in the case ofCIT v. Modi Rubber Ltd.[2017] 79 Taxmann.com 366. 6.2 The Ld.DR, on the other hand, supporting the order of the DRP submitted that providing loans and advances to AE constitutes an international transaction in terms of explanation to Sec.92B of the Act, and thus, same needs to be bench marked to determine ALP of the said transaction. The Ld.DR further submitted that there is no merit in the arguments of the assessee that there is a commercial expediency providing loans to its subsidiary, because, the assessee is engaged in the business of export of rough granite whereas, the subsidiary engaged in IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 14 :: the business of investments which is altogether different from assessee’s business and thus, it cannot be said that there is commercial benefit to the assessee. The Ld.DR further submitted that although, the assessee claims to have extended interest free loans to subsidiary out of own funds, but no evidence has been placed before the TPO as well as the DRP to substantiate its case and thus, the TPO/DRP has rightly computed interest on loans given to subsidiary and their orders should be upheld. 6.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The AO has made additions towards TP adjustment on interest free loans given to subsidiary on the ground that the assessee has borrowed loans from banks and extended interest free loans to subsidiary companies without charging any interest. It was the arguments of the assessee before the TPO that loans given to subsidiary is out of commercial expediency and further, the assessee has derived business advantage, because, the subsidiaries were engaged in the business of investment in group companies and also trading in similar products dealt by the assessee in Abroad and thus, the assessee has extended financial assistance to subsidiaries to augment its business requirements which benefitted the assessee company. The assessee had also contended the issue in light of decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd.,(Supra) and argued that loans have been given to subsidiaries out of own funds. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 15 :: 6.4 We have given our thoughtful consideration to the reasons given by the assessee in light of observations of the AO to compute notional interest on loans given to subsidiary and we find that where the assessee has advanced loans to subsidiary in the normal course of business and out of commercial expediency to derive business advantage and said transaction results in benefit to the assessee, then there is no question of imputing interest on notional basis towards loan given to subsidiary. Further, it is not correct that in every case interest on borrowed loans has to be disallowed if the assessee advances loans to sister concern and it all depends upon the facts and circumstances of the respective case. For example, if the Directors of the sister concern utilized the amount advanced to it by the parent company for their personal benefit, obviously, it cannot be said that such money was advanced as a measure of commercial expediency. However, if money is said to have been used for commercial expediency in the normal course of business, the Revenue cannot take a stand that the assessee has diverted interest bearing funds for non-business purpose. This legal principle is supported by the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. v. CIT [2007] 158 Taxmann.com 82 where it has been held that holding company has a deep interest in its subsidiary and hence, holding company advances borrowed money to subsidiary and the same is used by the subsidiary for some business purpose. The assessee would ordinarily be entitled to deduct interest on its borrowed loans. Further, IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 16 :: the Hon’ble Madras High Court in the case of CIT v. KEC [2020] 113 Taxmann.com 532 held that interest paid on borrowed funds utilized for investment in group companies for strategic business purpose is allowable as deduction. In this case, the AO has imputed notional interest on interest free loans given to sister concern on the ground that the assessee is paying huge interest on borrowed funds without appreciating the fact that there is a commercial expediency in advancing loans to sister concern. Therefore, on this count, additions made by the AO cannot be sustained. 6.5. Coming back to second argument taken by the Ld. Counsel in light of the decision of Hon’ble Supreme Court in the case of CIT v. Reliance Industries Ltd.,(Supra). The assessee claimed that loans given to subsidiaries is out of own funds and for this purpose, the assessee has filed a financial statement for the year 2012-13 and 2013-14 and as per said information, the own funds in the form of share capital and reserves & surplus was at Rs.114.66 Crs. and as against this, loan outstanding in the name of subsidiary companies was at Rs.83.68 Crs. The assessee claimed that loans given to subsidiary is out of own funds. It is a well settled principle of law by the decision of various courts including the decision of the Hon’ble Delhi High Court in the case of CIT v. Modi Rubber Ltd. (supra), where it has been held that where the assessee was having mixed pool of funds comprising own funds and loan funds, then interest free loans to sister concern would have to be considered as having given IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 17 :: out of assessee’s own funds. The Hon’ble Supreme Court in the case of CIT v. Reliance Industries [2017] 410 ITR 466 (SC) held that where the AO reject the assessee’s claim u/s.36(1)(iii) of the Act, taking a view that interest would have been payable to banks funds were not provided to subsidiaries. In view of the fact that interest free funds available to assessee which was sufficient to meet its investments in subsidiaries, appellate authorities were justified in allowing assessee’s claim for deduction. In this case, own funds available with the assessee is more than the amount of loan given to subsidiary and thus, we are of the considered view that a presumption goes in favour of the assessee that loans to subsidiary is out of own funds and thus, the question of imputing notional interest on loans to subsidiaries does not arise. Although, the TPO/DRP has considered such transaction as an international transaction and computed ALP by imputing notional interest, but fact remains that the law laid down by the Courts of this country on the issue is very clear, as per which, in case of commercial expediency, no notional interest can be imputed on loans to subsidiaries. Further, if mixed funds are available including borrowed funds, then presumption is in favour of the assessee that loans to subsidiaries is out of own funds. Therefore, we are of the considered view that the TPO/DRP erred in computing notional interest on loans to subsidiaries and thus, we direct the TPO/DRP to delete addition towards upward adjustment on loans to subsidiaries. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 18 :: 7. The next issue that came up for our consideration from Ground Nos.10-13 of the assessee’s appeal is disallowance of bill discounting charges u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.194A of the Act. The assessee claimed bill discounting charges of Rs.3,46,52,348/- paid to M/s.Vriddhi Corporate Finance Pvt. Ltd., without deducting TDS u/s.194A of the Act. The AO held that bill discounting charges is covered within the purview of interest definition u/s.2(28A) of the Act, and is liable to deduct TDS u/s.194A of the Act and thus, the AO has disallowed 30% of total bill discounting charges and made addition of Rs.1,03,95,704/- u/s.40(a)(ia) of the Act. 7.1 The Ld.AR for the assessee submitted that bill discounting charges paid by the assessee does not come under the definition of interest as defined u/s.2(28A) of the Act, and thus, the question of deduction of TDS u/s.194A of the Act, does not arise and consequently, the question of disallowance of bill discounting charges u/s.40(a)(ia) of the Act, does not arise. The Ld.AR for the assessee referring to the decision of the Hon’ble Delhi High Court in the case of M/s. Cargil Global Trading Ltd., in ITA No.331/2011 submitted that there was no debt incurred or money borrowed so as to be considered as interest on bill discounting charges paid by the assessee and thus, the AO is completely erred in disallowing bill discounting charges u/s.40(a)(ia) of the Act. In this regard, relied upon the CBDT Circular No.65 dated 02.09.1971. The Ld.AR for the IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 19 :: assessee further referring to Form 26A issued by Chartered Accountant in terms of Sec.201 of the Act, submitted that the payee has offered to tax, the amount of bill discounting charges paid by the assessee in the return of income and paid relevant taxes and thus, as per the proviso to Sec.u/s.40(a)(ia) of the Act, if payee is included sum paid by the assessee in the return of income and paid taxes, then, the question of disallowance of expenditure u/s.40(a)(ia) of the Act, does not arise. The Assessing Officer/DRP without appreciating relevant facts made additions. 7.2 The Ld. DR, on the other hand, supporting the order of the DRP, submitted that bill discounting charges is akin to interest as defined u/s.2(28A) of the Act, and thus, the assessee ought to have deducted TDS u/s.194A of the Act. Since, the assessee has failed to deduct TDS u/s.194A of the Act. the AO has rightly disallowed bill discounting charges u/s.40(a)(ia) of the Act, and their orders should be upheld. 7.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. Although, the assessee has made a primary argument on the issue of non-applicability of provisions of Sec.u/s.194A of the Act, for bill discounting charges in light of the decision of M/s. Cargil Global Trading Ltd., in ITA No.331/2011, where the Hon’ble Delhi High Court in light of CBDT Circular No.65 (F.No.275/79/TTJ] dated 02.09.1971, held that bill discounting charges in not interest and TDS u/s 194A is not deductible, but we prefer IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 20 :: to go to alternative arguments of the assessee in light of Form 26A Certificate issued by Chartered Accountant under first proviso to sec.201 of the Act, for certifying furnishing of return of income, payment of tax etc., by payee. We, further find that the payee M/s.Vriddhi Corporate Finance Pvt. Ltd., has filed return of income for the AY 2014-15 and offered to tax, a sum of Rs.3,20,63,032/- towards bill discounting charges received from assessee and paid necessary taxes applicable thereon. The Chartered Accountant certificate annexed to Form 26A clearly states that the assessee has filed return of income on 31.03.2016 and declared taxable income of Rs.13,06,82,162/- and paid taxes of Rs.4,44,18,866/- which includes bill discounting charges paid by the assessee amounting to Rs.3,20,63,032/-. Therefore, we are of the considered view that once the payee has included sum paid by the assessee without deduction of TDS in the return of income and paid relevant taxes, then first proviso to Sec.40(a)(ia) of the Act, comes into play and as per said provision, where assessee is not deemed to be a assessee in default as per the proviso to Sec.201 of the Act, it shall be deemed that the assessee has deducted and paid tax on such expenses and thus, no disallowance could be made u/s.40(a)(ia) of the Act, for non-deduction of Tax. In this case, the assessee has claimed bill discounting charges of Rs.3,46,52,348/- paid to M/s.Vriddhi Corporate Finance Pvt. Ltd., whereas the payee has furnished a certificate from an Accountant and claimed that it has received a sum of Rs.3,20,63,032/-. Thus, there is a difference of Rs.25,89,316/- when IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 21 :: compared to amount claimed by the assessee and the payee has certified the amount. Therefore, in our considered view, the issue needs to go back to the file of the AO for further verification in light of Form 26A filed by the assessee. Hence, we set aside the issue to the file of the AO and direct the AO to re-verify the issue in light of Form 26A filed by the assessee in terms of first proviso to sec.201 of the Act and in case, the AO find that the payee included a sum of Rs.3,20,63,032/-in their return of income field for the AY 2014-15 and paid relevant taxes, then the AO is directed to delete the addition made towards disallowance u/s.40(a)(ia) of the Act, to the extent of Rs.3,20,63,032/-. In respect of balance amount of Rs.25,89,316/-, the assessee could not file any evidence and thus, the AO is directed to sustain disallowance u/s.40(a)(ia) of the Act, for balance amount of Rs.25,89,316/-. 8. The next issue that came up for our consideration from Ground Nos.14-17 of the assessee’s appeal is disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962. The assessee has earned dividend income of Rs.28,438/- and claimed exempt income u/s.10(34) of the Act. However, does not made suo moto disallowance of expenditure relatable to exempt income. The AO has computed disallowance u/s.14A r.w.r.8D of the Rules at Rs.2,21,90,340/-. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 22 :: 8.1 The Ld.AR for the assessee submitted that if at all disallowance is required to be made in respect of expenditure relatable to exempt income, then such disallowance cannot exceed exempt income as held by various Courts including the Hon’ble Madras High Court in the case of PCIT v. Redington (India) Ltd. vs Addl, CIT (2017) 392 ITR 633(Madras) and also the decision of the Hon’ble Supreme Court in the case of CIT v. Chettinad Logistics Pvt Ltd.(2018) 95 Taxman.com 250(SC). Since, the assessee has earned dividend income of Rs.28,438/-, the disallowance computed by the AO may be restricted to the extent of dividend income of Rs.28,438/-. 8.2 The Ld.DR, on the other hand, supporting the order of the DRP, submitted that disallowance contemplated u/s.14A of the Act, shall be computed in accordance with rule 8D of IT Rules and thus, there is no error in the reasons given by the AO as well as the DRP to sustain the additions made by the AO and their orders should be upheld. 8.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. It is a well settled principle of law by the decision of various courts including the decision of the Hon’ble Madras High Court in the case of PCIT v. Redington (India) Ltd. (supra) where it has been held that where there is no exempt income in relevant assessment year, there cannot be disallowance of expenditure u/s.14A of the Act, in relation to any IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 23 :: assumed income. The Hon’ble Supreme Court in the case of CIT v. Chettinadu Logistics [2018] 257 Taxman.com 250 held that Sec.14A of the Act, cannot be invoked where no exempt income earned by the assessee in relevant assessment year. The Hon’ble Delhi High Court in the case of Chem Investment Ltd. [2015] 234 Taxman.com 761 held that sec.14A of the Act, will not apply if no exempt income is received or receivables during relevant previous year. The sum and substance of ratio laid down by the various courts is that the disallowance contemplated u/s.14A of the Act, shall not exceed exempt income. Therefore, we are of the considered view that the AO as well as the DRP is erred in computing disallowance u/s.14A r.w.r.8D of the Rules, in excess of exempt income earned for the year. In this case, the assessee has earned exempt income of Rs.28,438/-, whereas the AO has computed disallowance u/s.14A r.w.r.8D of the Rules at Rs.2,21,90,340/- which is in excess of exempt income and thus, we direct the AO to restrict the disallowance u/s.14A r.w.r.8D of the Rules, to the extent of exempt income of Rs.28,438/- earned for the relevant assessment year. 9. The next issue that came up for our consideration from Ground No.18 of the assessee’s appeal is interest on IT refund. The Ld.Counsel for the assessee at the time of hearing submitted that interest is compensatory in nature and not panel and thus, same needs to be allowed as deduction. IT (TP) A No.37/Chny/2018 M/s.Archean Industries Pvt. Ltd. :: 24 :: 9.1 The Ld. DR, on the other hand, supporting the order of the DRP, submitted that interest on IT cannot be allowed as deduction 9.2 We have heard both the parties and perused the materials available on record and we find that interest on IT is also in nature of tax which cannot be allowed as deduction and thus, we are of the considered view that the AO as well as the DRP has rightly disallowed interest on IT and thus, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee. 10. In the result, appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced on the day 19 th of October, 2022, in Chennai. Sd/- (वी. दुगा राव) (V. DURGA RAO) याियकसद य/JUDICIAL MEMBER Sd/- (जी. मंजूनाथा) (G. MANJUNATHA) लेखासद य/ACCOUNTANT MEMBER चे ई/Chennai, !दनांक/Dated: 19 th October, 2022. TLN आदेशक ितिलिपअ&ेिषत/Copy to: 1. अपीलाथ /Appellant 4. आयकरआयु'/CIT 2. यथ /Respondent 5. िवभागीय ितिनिध/DR 3. आयकरआयु' (अपील)/CIT(A) 6. गाड फाईल/GF sss