TMI Blog2012 (11) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax liability of Indian Enterprise as well as its AE on a total basis. Rather the logic is to make certain that the transactions between the AE should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. Important factor is the payment of tax qua India and not qua the assessee along with its AE on a whole. Therefore, rejecting the submission of assessee as devoid of any merit that there was no force in this argument of establishing a tax avoidance motive by the Revenue Department. Reference to TPO without providing an opportunity of hearing - Held that:- Decision of the AO to refer the international transaction to TPO for determination of ALP do not in any manner visit the assessee with any civil consequence. A safe-guard has already been provided in the Statute by making a compulsory provision about seeking of prior approval from the CIT by the AO. It was held that there should not be any grievance to the assessee because the TPO had given due opportunity to the assessee. We therefore hold that in the absence of any Statutory provision or a mandate of requirement of giving an opportunity before reference do not adversely affect a ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the year under consideration. Since all such information is not available on record, therefore the natural justice demands to restore this issue back to the stage of the AO to be decided. Disallowance u/s.14A - Held that:- Under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance after furnishing an opportunity to the assessee - remand the proceedings back to the AO for a fresh determination the fact of the present case was that the Assessing Officer had not enquired the issue in the light of applicability of Rule 8D. Disallowance in respect of irrecoverable balance written off - Held that:- The description of the equipment, the use of the equipment and the details about the advance given to the said party was not informed. Rather, it appeared that the assessee wanted to acquire a capital asset, as held by the AO, therefore the expenditure or advance being related to an acquisition of a capital asset, therefore not to be allowed in view of the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(3) r.w.s. 144C dated 22.10.2010. 2. Ground-wise decision is as under. Ground Nos.1 to 6 :- 1. Learned AO/DRP has erred in law and on facts in adding Rs.4,46,52,496/- on account of adjustments to the Arm's length price without there being any jurisdiction as well as legal and factual basis for the same. 2. Learned AO has erred in law and on facts in referring the case of the appellant to the transfer pricing officer. Under the facts and circumstances of the case, there was no reasons to interfere with the pricing adopted by the appellant as the same is falling within the parameters of transfer pricing laid down under the scheme of the Act. 3. Alternatively and without prejudice, the order of the Additional Commissioner of Income Tax acting as Transfer Pricing Officer is without jurisdiction and against the express provisions of law in as much as Commissioner of Income Tax could not have acted as transfer pricing officer. 4. The learned assessing officer has erred in law and on facts in invoking the provisions of Chapter X without prima facie demonstrating that there was some tax avoidance. 5. The learned assessing officer has erred in law and on facts in ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction with AE / Non AE, discrepancy in the nature of sale of product code 111108 (product name Novatic Brown R Pure) to non AE parties was through oversight shown as sale of product code 110308 (product name Novatic Olive R Pure). A certificated dated 6th August 2011 of M/s.Ghanshyam Parekh Co., Chartered Accountants with the sale Invoices in support of the above contention are annexed herewith for appreciation of the Hon'ble Bench." 3.1 The ITAT Bench has considered the petition and thereafter vide an order sheet entry dated 25.01.2012 has decided that the additional evidences as mentioned at Serial no. 1 2. are to be admitted , but the additional evidence at Serial No. 3 was not allowed to be admitted. With this back ground now we shall proceed to decide the controversies raised in this appeal. 4. Before us in respect of the above grounds the Appellant has primarily raised the objections about the stand taken by the T.P.O. in respect of the following two additions:- ( a ) Upward adjustment in respect of the goods sold by the assessee to 'AE' at lower price as compared to the third party, the upward adjustment of .. Rs.1,74,69,516/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies for re-distribution in the respective markets. It has also been noted by the TPO that although the assessee had chosen CUP method but did not furnish the comparison of sales with supporting Internal CUP or External CUP in respect of all the products/ transaction. So the TPO has issued a show-cause notice asking the assessee to furnish internal/external comparable uncontrolled price for all the products exported to the A.E.'s. Hence for the purpose of determination of Arm's Length Price it was asked to furnish the comparable transaction for bench-marking. 4.4 The assessee has furnished the details of the products sold and also furnished the internal external uncontrolled prices which were stated to be available to the assessee. The assessee had asked for the adjustments namely; (a) difference in application, (b) quantity discount, (c) marketing risk, (d) financial risk. The adjustments claimed by the assessee were listed by the TPO as under :- "(i) The assessee has claimed 100% adjustments in prices for issue of difference in applications. (ii) The assessee has claimed quantity discount of 2% and 5%. (iii) The assessee has claimed adjustment for marketing risk at 5% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct code 402141, 403211 and 152583. For these products, sales to AE is less than sale to non-AEs. It can be seen from the above paragraph, assessee has sold 16830 kg of Novatic Olive R Pure to M/s.Dyestar, Germany whereas sale to the AE of the same product is only 9259 kg. Similar is the situation of other products. In view of the above, assessee's claim, specifically to these 4 products regarding upward quantity adjustment is rejected." 4.8 Finally the TPO has concluded that the upward adjustment as offered by the assessee of Rs. 1,09,80,062/- was to be increased to Rs. 1,74,69,516/-. To arrive at this figure there are Annexures to the said order as 'Annexure A to D' in relation to all the four Associate Enterprises, summarised as under :- Annexure "A" Rs. 1,11,28,585/- Annexure "B" Rs. 40,46,606/- Annexure "C" Rs. 42,62,272/- Annexure "D" Rs. 18,68,053/- Total Rs. 1,74,69,516/- 5. The matter was referred to Dispute Resolution Panel (in short DRP) and for the sake of completeness the relevant observations shall only be discussed. The chief objection of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Philips Software Centre(P) Ltd.{26 SOT 226 (Bang.)} was transversely opposite to the five member decision of Aztec Software Technology Services Ltd. hence it was held in MSS India Pvt. Ltd (supra ) that the five member Special Bench decision is required to be adopted in preference to a Division Bench decision. 5.3 An another view of the DRP is hereby required to be mentioned through which it was opined that the important factor is the payment of tax qua India and not qua the tax along-with the A.E. The rationale behind the T.P. provisions is to curtail the avoidance of tax in India. Intent and purpose is to ensure that there is no diminution in the tax liability of an Indian Enterprise. How much tax is paid by the foreign A.E. is not relevant in the determination of correct tax liability in the hands of an Indian Enterprise. The payment of tax by A.E. abroad does not contribute anything to Indian exchequer. So it is wrong to argue that the tax liability of an Indian Enterprise is to be seen along-with the abroad tax liability of A.E. on a total basis. For this legal proposition the case law relied upon was Gharda Chemicals Ltd. 5.4 On the question of proposed adjustments of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I 4652281 7513080 -2860799 2. AEL 426272 18897943 -18471671 3. ADG 4046607 3343034 703573 4. AITSCL 1854903 531090 1323813 10980061 30285147 -19305085" 5.6 So, Ld.AR has described page 94 that under the head "addition" the total of the amount of transaction with all the 4 AEs was amounting to Rs.1,09,80,061/-, which was under charged. However, with those 4 AEs there were transactions which were over charged and tabulated under the head "deletion" amounting to Rs.3,02,85,147/-. He has submitted that since the amount which was overcharged was higher in figure, therefore the net amount was in the minus figure. Thus showing that there was no requirement of any adjustment since ultimate result of all the transaction was that there was no transfer of profit by charging less from the AEs. 5.7 He has also drawn our attention on OECD guidelines which were narrated to the Revenue Authorities and the extract of the same is as under:- "In this context, we rely on the clause (d) of Rule 10A of the income tax rules 1962 which permits aggreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n quantity was 9259 kgs. as against that the quantity sold to non-AE was 17820 kgs. The FOB per kg.charged was 664.47 from AE as against that the FOB per kg.charged from non-AE was 1778.79 kgs. Thus, the difference was (-)1114.3. In respect of this product only 100% 'difference in application' was adjusted. Further, there was difference in quantity, therefore 5% quantity discounted was also adjusted. Furthermore, a 5% discount on account of marketing and distribution was given. He has thus pleaded that the adjustments which were made by the assessee were reasonable and should have been allowed by the TPO. Rather, he has appreciated that the TPO has given the claim of adjustment in respect of marketing risk and lower price prevailing in China market as also adjustment in price due to long term contract at 11%, but not allowed "difference in application" and "quantity discount". The adjustments as made by the TPO in annexure ABC D are hypothetical and without any basis. 5.9 Ld.AR has vehemently contested that it was wrong on the part of the AO as well as TPO that the assessee himself has offered upward transfer pricing adjustment of Rs.1,09,80,061/-. He has informed that the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of transfer pricing, DCIT Mr.Anurag Sharma has pleaded that the argument on principle of aggregation are against the provisions of transfer pricing as incorporated under the statute. As far as the "most appropriate method" is concerned, the Revenue as also the assessee, both, have adopted the CUP method and there is no controversy in this regard. Mr. Sharma has pointed out that although the ld.AR has pleaded the principle of aggregation, however while submitting the document in respect of transfer pricing the assessee has taken into account all the sale transactions to the AEs for the purpose of comparability pertaining to a single product. The assessee has calculated the average rate and the same was compared with the average rate of sale transaction to non-AE. He has pleaded that the assessee has therefore considered the products as a closely linked transaction for the purpose of comparability in accordance with the provisions of rule 10A(d), but it was an incorrect understanding of the said sub-section. Even under Rule 10B(1), the sub-rule(ii) says that the price is to be adjusted between the international transaction and the comparable uncontrolled transactions. The term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 96 the product with code 16831 of CO division is sold at an average rate of 57.52. If the assessee's contention of aggregating all products is taken into account, it would lead to situation in which the average per unit rate for sale of these products would be 1839 ([57.52 + 3620.44]/2). Now consider the situation in which the product having code 16831 is sold by the assessee at Rs.7.52 and the other product is sold at 3680.44, giving an average per unit rate of 1844. In such a scenario it may be claimed that on aggregate basis the average price charged in second case is more, while the fact is that the first product was old at a largely depressed price, which is clearly not ALP. As per the Transfer Pricing Regulations, the arm's length price is required to be determined for each international transaction as defined in section 92(1) of the IT Act where in the section talks about "an" international transaction. By aggregating the transactions of different products, the non-arm s length nature of one transaction is masked by the price of other, which is clearly not as per the provisions of Indian law. In this respect reliance is also placed on the judgment delivered by ITAT, Mumb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprises, stated to be wholly owed subsidiaries. Names of those A.Es and the nature of transaction has been discussed above( ref. para 4.2 supra). The assessee has six manufacturing divisions of dyes, chemicals, agrochemicals, etc. These manufactured products were exported to A.Es. Through Form 3 CEB it was informed that the assessee was selling the products manufactured by the holding company, i.e. assessee. The assessee company was thus considered as the "Tested Party" for the purpose of the said document. One more fact has also emerged that a preliminary search was performed by the assessee company to get the potentially comparable uncontrolled transaction so identified 'internal comparables'. We have therefore noticed that the transactions undertaken with unrelated enterprises by the assessee company were internally compared. It is worth to comment, which shall have a bearing in our decision hereinbelow, that those were somewhat similar transactions, but neither the same transaction nor identical transactions. There is no dispute that the most appropriate method selected by the assessee was the CUP method thus fulfilled the requirement of Rule 10C of I.T. Rules. The accepted pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one hand the assessee wanted five type of adjustment in the sale price fetched by the assessee from the transaction with it's AEs, but on the other hand the TPO has allowed three adjustments i.e. (i) adjustment of 5% towards marketing financial risk, (ii) adjustment of 11% of long terms contract (iii) adjustment of 30% to 50% of price difference due to lower price of China market. But the TPO has not allowed two adjustments i.e (1) an adjustment of 100% towards 'difference in application' and (2) an adjustment of 2% to 5% towards 'quantity discount'. After giving his reasons in the impugned referral order passed U/s 92CA(3), the TPO has attached four "A", "B", "C" "D" Annexure giving the details of comparative data of sales made to AE and Non-AE. Annexure 'A' suggested the maximum upward adjustment of Rs.1,11,28,585/-. We have studied this annexure. There are four Divisions covered in 'A' Anx. We have further noticed that the maximum difference is in respect of a Product (110308) . The quantity sold to A.E. of this product was 9,259 Kg. but to Non A.E. quantity sold was 17,820 Kg. The FOB per Kg. rate was for A.E. at Rs.664.47 but rate charged from Non-A.E. was at Rs. 1,778.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated the price difference at Rs.383.4. The assessee has sold to A.E. @ 664.47, however the TPO has calculated the ALP at 1081.1. However, for the purpose of claims of adjustment, the assessee is to demonstrate satisfactorily the correct nature of the product, its marketing strategy and the risk involved for which the assessee is asking for certain adjustments. Due to this reason, we deem it proper to restore this part of the adjustment back to the stage of the AO for de novo consideration, needless to say after providing reasonable opportunity to the assessee. 5.19.1 It is expected from us to give a finding in respect of one of the adjustment as demanded by the assessee however, rejected by the T.P.O. We are talking about the claim of 100% adjustment in price for 'difference in application'. The claim of the assessee was that the clients use the product purchased differently as per their business requirement. It was argued that the products sold to different parties are being used differently by them. It was explained that a chemical can be utilized in different manner. Like-wise aromatics or colors were used in plastic paints as also can be used in auto paint. So the argument i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is concerned, we are of the view that it is a common market practice that the bulk-purchasers are generally given some discount. If the A.Es have been given sale-price discount due to the high quantity of purchases then the assessee is required to place on record the commercial policy of the assessee-company, whether based upon some agreement or resolution. The assessee is also expected to demonstrate with supporting evidence the basis of applying 2% adjustment and in some cases it was found to be 5% adjustment. A natural question has also come up that whether such discount in sale price had also been granted by the assessee to Non-A.E. on bulk purchases. However, we are of the view that the T.P.O was not justified in rejecting that claim which is otherwise prevalent in the market and can be said to be a common market practice. But before claiming this adjustment the assessee must be fair in not claiming this adjustment on such sale transaction to A.Es. which are apparently lower than the sales to Non-A.E. Rather bulk- purchases by the A.Es. are only required to be taken into account for this adjustment. We direct accordingly. 5.20 We have given our thoughtful consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be computed having regard to the arm's length price." Unquote. So the article 'an' has significance. 5.21 We have examined the principle of aggregation in the light of the facts of this case. On perusal, we have noted that there are several products manufactured by the assessee at different divisions. In the above paras, we have discussed the existence of several divisions which are engaged in manufacturing different products. When the manufacturing process and risk factors are diversified, therefore it is not advisable to aggregate all those products. In this regard, functions performed, assets utilized and risk undertaken (in short FAR analysis) gives us certain guidelines and, therefore, on the basis of FAR analysis a product of one division cannot be compared with the product manufactured in other division. Rather, we have noted that there is a contradiction in the argument of ld.AR. Ld.AR has argued at one point of time that an adjustment is required on account of difference in application. In other words, the AR has admitted that the different products have different end-use. Whether such products can be considered as closely linked products is a question mark?. Rath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a separate transaction. Therefore, the AO was right in examining each transaction separately for this purpose. It is seen that the assessee has not been able to bring anything on record that various purchases were a part of pre-arranged scheme or agreement so as to constitute a part of the indivisible transactions of purchase. Accordingly, it is held that the AO was within his right to evaluate each transaction separately." In the light of the above discussion and respectfully following the precedents cited, we hereby reject the pleading of ld. AR through which it was demanded to aggregate the entire transaction with the AE for the whole year. 5.24 Mr. Soparkar has raised one more issue which was in respect of "tax avoidance motive". In this regard, at the outset, we hereby place reliance on Azetc Software Technology Services Ltd. v. Asst. CIT reported at [2007] 107 ITD 141 (Bang) (SB), wherein vide para 16 the Respected Tribunal has opined that as per the mandate of section 92(1), income from International transaction between AEs has to be computed having regard to arm's length price. Therefore, question of tax avoidance is to be established by following mandatory provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax avoidance motive by the Revenue Department, hence we hereby dismiss this part of the argument of the assessee. 5.25 In the ground of appeal in respect of transfer pricing adjustment, the assessee has raised sub-ground No.5 and agitated that the AO had erred in law in making a reference to TPO without providing an opportunity of hearing. We are not convinced with this objection because in the case of Coca Cola India Inc.(supra) it was held that a decision of the AO to refer the international transaction to TPO for determination of ALP do not in any manner visit the assessee with any civil consequence. A safe-guard has already been provided in the Statute by making a compulsory provision about seeking of prior approval from the CIT by the AO. It was held that there should not be any grievance to the assessee because the TPO had given due opportunity to the assessee. We therefore hold that in the absence of any Statutory provision or a mandate of requirement of giving an opportunity before reference do not adversely affect a taxpayer because the TPO has definitely given sufficient opportunity to the assessee. Finally, in the result, this ground no. 1 along with the sub-grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were of the view that it is not within the domain of the Transfer Pricing Officer to determine whether a particular transaction, which has come to his notice, but which has not been referred to him, is or is not an international transaction and then to go on and determine the arm's length price thereof. That, we feel, is in the exclusive jurisdiction of the Assessing Officer. It ought to be pointed out that these views are on the basis of the provisions of Section 92CA, as applicable to the assessment year 2006-07, that is, prior to the introduction of sub-section (2A) of Section 92CA by virtue of the Finance Act, 29011 with effect from 01.06.2011." unquote. Respectfully following this decision, we hereby allow this additional ground of the assessee. 5.27 While reading the order of the Hon'ble Delhi High Court (supra) in the case of Amadeus India (P) Ltd. we have noted that it was also pronounced that the assessment is an exclusive jurisdiction of the AO. In the present case, the AO was handicapped about this information being not reported in Form 3CEB. Therefore, at the time of reference the AO could not know whether there was a cross-order transaction between the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 92C(1) r.w. sub-section (3) is concerned, the language of this sub-section is that where during the course of any proceeding for the assessment of the income, the AO is on the basis of material or information or document in his possession of the opinion that the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) (2) of section 92C, then the AO may proceed to determine the arm's length price in relation to the said international transaction on the basis of such material or information or document available with him. As against this provision, a counter argument has been raised by ld. AR by referring the provisions of section 92CA sub-section (4) which says that On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. The argument is that the AO shall compute the income in conformity with the arm's length price as determined by the AO, but if part of the TPO's adjustment is void ab initio, then that part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cannot be stated to be bound by the opinion of the TPO with respect to the question whether there had been an international transaction between the assessee and the AE. The issue is within the sole jurisdiction of the AO, held by the Hon'ble Court. A procedural aspect has also been streamlined by the Hon'ble Court by stating that u/s. 144C the AO has to forward a draft of the proposed order to the assessee. The assessee has one more opportunity to contest the addition. The assessee has an option either to file his acceptance of the variation of the assessment or file his objection to any such variation with the Dispute Resolution Panel. The DRP is also authorized to issue direction as it thinks fit for the guidance of the AO. At that stage as well the assessee has an opportunity of hearing. The AO is thereafter shall in conformity with the directions of the DRP complete the assessment proceedings. Only under sub-section 13 of section 144C of the Act, such direction are binding upon the assessee. So the existence of an international transaction can be examined by the DRP at the instance of the assessee. The Court has said that there is nothing to limit the powers of DRP. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the services provided and in turn commission paid the Atul Europe Ltd. had claimed payment of commission ₤391251. The Revenue has contested before us that in response to the said enquiry, the Atul Europe Ltd. has answered that an amount of ₤154530 was payable to assessee (Atul Pesticide) and further a commission of ₤190888 was payable to assessee (Agro Division). As against that, the assessee has vehemently contested that there was no actual receipt of commission, on the contrary the assessee was supposed to pay the commission to Atul Europe Ltd. In this connection, few correspondences with Atul Europe Ltd. are now placed in the compilation. It has also been contested that the assessee had never debited commission in its books of accounts and never claimed expenditure. From the facts and the evidences now placed it is evident that the counter-claims are yet to be re-examined afresh by the AO. If the assessee is in a position to demonstrate that no commission in fact was received and on investigation the AO is satisfied, then the impugned addition/upward adjustment is required to be deleted. With these directions, we hereby hold that the upward adjustme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arately initiated for furnishing inaccurate particulars of income." 6.2 Even the DRP has affirmed the action of the AO. DRP has noted that the assessee had not furnished any evidence in support of its claim that the liability in respect of the prior period expenditure had actually been crystallized during the year under consideration. According to DRP, the appellant had although placed reliance on Saurashtra Cements Chemicals Industries Ltd. reported at 213 ITR 523 (Guj.) but the proof about the crystallization of liability was not produced. The DRP has finalised that since the assessee had maintained the accounts on mercantile basis, therefore AO was justified in proposing to make the said disallowance. 7. From the side of the appellant, ld. AR Mr. S.N. Soparkar has pleaded that the liability had crystallized during the year, therefore the expenditure was to be allowed in the year under consideration. He has cited Toyo Engg. India Ltd. v. Jt. CIT reported at [2006] 5 SOT 616 (Mum.) and CIT v. Jagatjit Industries Ltd. reported at [2010] 48 DTR (Del) 104. 8. On the other hand, from the side of the Revenue, ld. DR Mr. D.P. Gupta has supported action of the AO primarily on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration was to be demonstrated by the assessee. There is no evidence on record about the source of such income and what will be the impact of its taxability during the year under consideration. How it was termed as an income of earlier years if it was earned during the year under consideration. Since all such information is not available on record, therefore the natural justice demands to restore this issue back to the stage of the AO to be decided in the light of the observations made hereinabove, after providing a reasonable opportunity of hearing to the assessee. In the result, both the grounds of the assessee may be treated as allowed for statistical purposes only. 10. Ground No.9 reads as under: Disallowance of Rs.2,26,03,000/- u/s.14A of the Act. 9. The ld. AO/DRP has erred in law and on facts of the case by proposing to add Rs. 2,26,03,000/- u/s. 14A of the Act by applying provisions of Rule 8 of the income Tax rules, 1962. 10.1 The dividend income, which was claimed as an exempt income, was amounting to Rs. 4,26,31,480/-. The AO has proposed to invoke the provisions of section 14A to disallow the proportionate expenditure. The assessee's contention was that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of DRP is concerned, the same revolve around the findings of the AO and few case laws as discussed by the appellant. Mainly the ld. DRP has discussed the decision of M/s. Daga Capital Management Pvt. Ltd. (supra) and proposed for the said disallowance. 11. From the side of the assessee, ld. AR has cited two decisions; namely, CIT v. Raghuvir Synthetics (Tax Appeal No. 829 of 2007) order dated 5.12.2011 and the decision of CIT v. Gujarat Power Corporation Ltd. (Tax Appeal No. 1587 of 2009) order dated 28.3.2011. Both these orders have been passed by the Hon'ble Gujarat High Court. These orders revolve around the issue of proportionate disallowance of interest and in this regard on the basis of the facts on those cases it was held that no part of the borrowed funds could be stated to have been diverted to earn tax-free income. Facts of those cases have revealed that the borrowed funds were utilized for its own business purposes and that the investment in earning tax-free income were made out of own interest-free funds. Therefore, the ld. AR has contested that the component of interest expenses was not to be taken into account in the formula as applied by the AO. 12. From the si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Hon'ble Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon'ble Court has also pointed out the importance of Rule 8D of the I.T. Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub-sections (2) (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001, however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008, relevant findings are reproduced below:- "(a) The ITAT had recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion : 74. Our conclusions in this judgment are as follows ; (i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1); (ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n guidelines, though can not be said to be exhaustive or complete, but on these lines, the Assessing Officer is expected henceforth to compute the correct disallowance, needless to say after providing an adequate opportunity of hearing to the assessee. In the light of the above discussion, therefore, the matter is restored to be decided afresh, hence, this ground of the assessee may be treated as allowed for statistical purposes. 14. Ground No.10 reads as under:- Disallowance of Rs.12,50,444/- in respect of irrecoverable balance written off 10. The ld. AO/DRP has erred in law and on facts of the case by proposing to disallow Rs. 12,50,444/- in respect of irrecoverable balance which were written off in the books of accounts. 14.1 The AO has noted that a sum of Rs. 29,55,870/- was debited as "irrecoverable balances written off" in the P L account. The assessee has informed that out of the said amount which was written off in the P L account a sum of Rs. 12,50,444/- was written off which was in respect to M/s. Sando Industries. It was informed that the assessee had given an advance to the said party for one equipment. The said party had completed the work, however, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the background of the case, we are not going into that detail. We have noticed that in respect of new power plant the deduction was denied following the past history according to which the Tribunal has upheld the denial of deduction in A.Y. 2001-02. In respect of "captive power plant", the AO had noted that in A.Y. 2005-06, after detailed reasoning the deduction u/s.80IA was denied. For the year under consideration, the AO had examined the internal consumption and the gain shown in the books of account. According to AO, the percentage of gain was at 32.26% which was inordinately high. The AO has also noted that the credit for electricity was taken at Rs. 5.199 on the basis of the charges of the Gujarat Electricity Board. As against that, the alleged notional rate of credit of electricity charges was reduced by the AO to Rs. 3.699 with the result the AO has calculated the cost of generation at Rs. 5,16,50,269/-. Resultantly, the claim was restricted to the said amount as against the claim of the assessee. About the third Unit, i.e. co-generation plant, the AO had worked out the gain at 19.99% which according to him was towards higher side. The AO has calculated the cost of ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in A.Y. 2001-02. However, the AO had thrust upon the depreciation on the assessee for A.Y. 2001-02. The action of the AO was stated to be confirmed by the ITAT. It was noted by the AO that still the assessee continue to claim the depreciation as per the original working, i.e. without deducting depreciation which had already been allowed in A.Y. 2001-02. Hence, a conclusion was drawn by the AO that the claim of depreciation for the current year, i.e. A.Y. 2006-07 was required to be reduced by the amount of depreciation already allowed from A.Y. 2001-02 uptill A.Y. 2005-06. The assessee had submitted a revised working of depreciation. According to the revised working, the depreciation was computed at Rs. 24,38,17,771/-. The difference between the two, i.e. the original claim of depreciation and the revised claim of depreciation was thus computed by the AO at Rs. 1,21,18,801/-. In the result, the excessive claim of depreciation was disallowed. In this regard, the only argument of the assessee's counsel was that the claim of depreciation for the year under consideration is consequential of earlier years' judgement. While deciding the appeal of the assessee for A.Y. 2001-02, Respected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind no legal fallacy in the aforesaid adjustment made by the AO. Even before us, no legal argument was raised. The only submission is that since few past years are involved, therefore in case of any mistake in calculation of unabsorbed depreciation, then the same may be directed to be rectified. This pleading could have been raised before the AO who is empowered to pass an order u/s. 154 of IT Act and in case of any mistake the same can be rectified. At present, in the absence of any supporting re-calculation by the assessee, we are not inclined to interfere with the calculation of the carried forward depreciation as made by the AO. This ground is dismissed. 20. Ground Nos.14 15 read as under: 14. Initiation of levy of interest u/s.234B, 234D and withdrawal of interest u/s.244A of the Act is not justified. 15. Initiation of penalty u/s.271(1)(c) of the Act is not justified. 20.1 These two grounds are at present pre-mature and consequential in nature, hence not to be adjudicated. 21. Rest of the grounds are common in nature, hence not argued, therefore dismissed. 22. In the result, Assessee's appeal is partly allowed that too for statistical purposes. - - TaxTMI - T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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