ACIT Vs Reliance Coal Resoures Pvt. Ltd. (ITAT Mumbai)
The Income Tax Appellate Tribunal, Mumbai, dealt with a departmental appeal against the order of the National Faceless Appeal Centre for Assessment Year 2020–21 concerning disallowance of interest expenditure. The appeal, delayed by 22 days, was admitted after condonation of delay. The dispute centered on the deletion of disallowance of interest expenses amounting to Rs. 47.76 crore.
The assessee, a corporate entity engaged in coal-related activities, had borrowed funds from its holding company at an interest rate of 15% and advanced loans to its overseas subsidiary in the Netherlands at an interest rate of 5%. The Assessing Officer observed that charging a lower rate of interest on loans advanced, while paying higher interest on borrowings, resulted in loss to the assessee. Consequently, the Assessing Officer disallowed interest expenditure under Section 36(1)(iii), alleging understatement of income.
The assessee explained that the loan to the overseas subsidiary was in foreign currency and the prevailing interest rate in the borrower’s country ranged between 3% and 4%. Therefore, charging interest at 5% was consistent with market conditions. The Assessing Officer, however, rejected this explanation and made the disallowance.
On appeal, the First Appellate Authority examined the factual and financial context. It noted that the assessee facilitated coal procurement through overseas investments routed via its Netherlands-based subsidiary. The transactions between the assessee and its holding company were in Indian currency, whereas those with the overseas subsidiary were in foreign currency. The authority further observed that the assessee earned foreign exchange gains due to currency fluctuation, amounting to Rs. 31.61 crore during the relevant year, which had been offered to tax. Additionally, it was found that the Transfer Pricing Officer had accepted the 5% interest rate as being at arm’s length, requiring no adjustment. The authority concluded that the loan transaction was commercially expedient and deleted the disallowance.
