Interest-free loans to subsidiaries allowable if commercially expedient; non-resident service payments not FTS under DTAAs lacking such article, covered as IPS if no PE/stay threshold breached; no 195(2) needed if not taxable.

ORDER

PER BRAJESH KUMAR SINGH, AM,

This appeal filed by the assessee is directed against the order dated 28.01.2019 of the ld. CIT(A)-16, New Delhi, arising out of order u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to ‘the Act’) dated 16.03.2016 relating to Assessment Year 2013-14.

2. Brief facts of the case:- The Assessing Officer noted that the assessee had claimed interest expenditure on inter corporate deposit amounting to Rs.24,53,696/-. The Assessing Officer further noted that the assessee during the year had advanced interest free loans to its three associate concerns and had not charged any interest on such advances. The Assessing Officer asked the assessee to explain why interest debited in the profit & loss account amounting to Rs.24,53,696/- being expenditure not directly related for the enhancement of business income should not be disallowed. In reply assessee submitted as follows;

In this regard, it is respectfully submitted that such interest free ICDs to subsidiaries, also engaged in the business of hospitality and being in a financial losses were given in order to fund/support the business venture and strategic investments of the company: owning to our business interest held in such companies. Thus, it was fully based on commercial expediency and strategic nature of investment made earlier. In this regard, is placed on the decision of Supreme Court in the case of Hero Cycles Pvt. Ltd. vs. CIT, Ludhiana, 281 CTR 481, 236 Taxman 447 dated 05-11-2015 and S A Builders Ltd. vs. CIT, Chandigarh 288 ITR-1, 206 CTR 63 / dt. 14/12/2016. "

2.1. The Assessing Officer did not agree with the same for the reasons as stated in para 3.3 of his order and disallowed a sum of Rs.24,36,140/- after allowing credit of Rs.17,556/- being interest received.

3. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) after considering the facts accepted the plea of the assessee that the loans given to M/s Desert Friendly Camp Pvt. Ltd. and Rs.2 lakhs to M/s Sujan Art Ltd. were not hit by provisions of section 36(1)(iii) of the Act and directed the Assessing Officer to delete the proportionate disallowance of the interest on the said loans. However, in respect of interest free loan to M/s Forest Friendly Camp Pvt. Ltd.(hereinafter referred to ‘FFC’), the ld. CIT(A) noted that the facts were somewhat different. The Ld. CIT(A) noted that perusal of the financial statement of M/s Forest Friendly Camp Pvt. Ltd. as on 31.03.2013 showed a profit of Rs.7,57,862/- and profit after tax of Rs.10,73,326/-. The Ld. CIT(A) noted that revenue from operations during the said period amounting to Rs.3,25,42,615/- was decent if not robust. The ld. CIT(A) further noted that the perusal of the cash flow statement shows that the cash flow from operating activities was Rs.10,73,326/- up from a loss of Rs.72,62,839/- in the immediately preceding year. The Ld. CIT(A) observed that despite the improved financial health of M/s Forest Friendly Camps (P.) Ltd. the loan from the holding assessee company had increased fromRs.2.60 Crores to Rs.4.18 Crores. The Ld. CIT(A), in view of these facts observed that the claim of the assessee company that interest bearing loan taken from Asia Investment Ltd. and given to M/s Forest Friendly Camps (P.) Ltd. for the purpose of business does not ring true. In view of these facts, the Ld. CIT(A) held that the interest accrued on loans that were given to M/s Forest Friendly Camps (P.) Ltd. do not fall within the ambit of provisions o