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TMI Blog2014 (3) TMI 892X X X X Extracts X X X X X X X X Extracts X X X X ..... ial suppliers located in Singapore and Malaysia. It was stated that vendors provided credit facility up to six months for which the assessee paid the interest and some of the suppliers placed separate invoice after supply of raw material and for interest. The bill raised by the supplier for the raw material as well as for the interest were received through the local bankers and the local bank after charging its commission debited the amount to the foreign party in dollars. W hen the assessee was asked by the AO as to whether it had deducted tax at source u/s 195 of the Act, it was stated that no deduction was made. The AO while proposing to disallow u/s 40(a)(ia) for non deduction of tax at source from the interest paid to the foreign parties, asked the assessee to file its objections. In reply, the assessee submitted that though the interest was mentioned separately and separate invoices were raised, the interest partakes the character of purchase price and therefore the interest has to be treated as cost of material. The assessee relied on the decision of Hon'ble Jurisdictional Tribunal's in the case of M/s NSL Ltd. Vs. DCIT 588/Hyd/1996 dated 31/01/2006 and also the Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rranted and should be deleted. 7. The CIT(A) after considering the submissions of the assessee and the case laws on the subject, discussed the decisions in the case of Vijay Ship Breaking Corporation & Others Vs. CIT, 314 ITR 309 and the decision in the case of CIT Vs. Visakhapatnam Port Trust, 144 ITR 146. The CIT(A) also discussed the decision of the jurisdictional Tribunal in the case of Vijay Electricals Ltd. (supra) wherein it had been held that usance interest payable outside India for purchase outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India and cannot be considered as interest u/s 2(28A) of the Act, and it takes the character of purchase price of supplies. The CIT(A), therefore, allowed this ground of appeal of the assessee. 8. With regard to the second ground disallowing Rs. 48,98,500/- u/s 36(1)(iii) of the Act, before the CIT(A) the AO had filed written submissions vide letter dated 08/11/2011 stating that during the course of scrutiny proceedings for AY 2009-10 the assessee itself had charged interest on the amount advanced to related concerns M/s Agarwal Sponge & Energy Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62,31,979 iv) Capital Subsidy Rs. 65,80,200 v) Profit & Loss account Rs. 57,41,875 Rs.7,02,55,197 12. It was submitted that the interest free funds available with the assessee company which includes capital, reserves and P&L account balance is to a tune of Rs. 7.02 crores and a further sum of Rs. 5.50 crore being interest free advances received from sister concerns which in all aggregate to Rs. 12.52 crore. As against these interest free funds of Rs. 12.52 crores the interest free loans given is Rs. 6.80 crores. It was argued the interest free advances are more than amply covered by the availability of interest free funds and consequently the decision of Hon'ble Delhi High Court in the case of CIT Vs. Tin Box Company reported in 260 ITR 637 is fully applicable to the facts of the case. Therefore, the disallowance is wholly unwarranted. 13. The CIT(A) reproduced at pages 9 and 10 of his order the assessee's submissions vide letter dated 09/12/2011 in reply to the written submissions filed by the AO before the CIT(A). 14. After considering the submissions of the assessee and remand report as well as the submissions of the AO, the CIT(A) held as under:- "6.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sister concerns is not acceptable." 17. As regards, the disallowance of Rs. 2,29,76,459/- u/s 40(a)(ia) of the Act, the learned counsel for the assessee Shri Ratnakar reiterated the submissions as made before the CIT(A) and submitted that the amount of Rs. 2,29,76,459/- represents the amounts paid and also amounts payable either to the exporters or the foreign banker in Singapore and Indonesia. The learned counsel submitted that the person who actually receives the amount is not within the knowledge of the respondent company and it could be either the exporter, or foreign banker or any other person in between the foreign banker and exporter depending on whether the LC is discounted and the person discounting the L/C. The learned counsel further submitted that as per the decision of the Special Bench in the case of M/s Merilyn Shipping & Transports Visakhapatnam Vs. ACIT in ITA No. 477/Viz/2008 dt. 29/03/2012, the provisions of section 40(a)(ia) are attracted only to amounts provided but not paid during the year and do not apply amounts paid during the year. Based on the said decision, the learned counsel submitted that even without going into the merits of the applicability of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case, we do not find any infirmity in the order of the CIT(A) in deleting the disallowance made by the AO u/s 40(a)(ia) of the Act, and accordingly, we confirm the order of the CIT(A) and dismiss the ground raised by the revenue on this issue. 22. As regards the disallowance of Rs. 48,98,500/-, the learned counsel submitted that the allegation made by the AO, namely a) amounts borrowed on interest were advanced to the Agarwal Sponge & Energy Pvt. Ltd. and Satish & Co. and, b) advances given are unrelated to the assessee's business, is erroneous as the assessee received a sum of Rs. 5,50,00,000/- free of interest from other family members or concerns belonging to the family members, while, the amounts advanced by the assessee company free of interest to the sister concerns is about 6.80 crores, therefore, to the extent of Rs. 5.50 crores no loss is caused to the assessee if the funds received free of interest are deployed free of interest again with the family entities. 23. As regards the difference of Rs. 1.30 crores, which is lent to the family concerns, the learned counsel for the assessee submitted that the amount of Rs. 1.30 lakhs advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank overdraft used by the appellant as such as Rs. 4.62 crores and his statement that there is no question of having own funds appears to be incorrect in view of the details of the share capital and share reserves appearing in the balance sheet of the appellant company which amounts to Rs. 7,02,55,197/- and the AO was silent on the interest free funds received from their sister concerns. If the appellant has got surplus funds which do not carry interest and also as other borrowals like bank overdraft etc., as per various judicial decisions the presumption is that the interest free and own funds are advanced to the sister concerns and therefore the charging of notional interest does not arise. The AO was also of the same view when he stated in the assessment order at para 5.5 if the assessee lends its own money, the department cannot make any addition towards notionally accrued interest. From the balance sheet, it is noticed that the contention of the appellant that it has got paid up share capital other reserves and profit aggregating to Rs. 7,02,55,197/- this amount along with the interest free funds received from their sister concerns would total up to Rs. 12.52 crores and out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts of the case. 2. The learned CIT(A) erred in deletion of addition made for the failure in deduction of tax u/s 195 of the IT Act on the delayed payments of purchase consideration to raw material suppliers situated outside India. 3. The learned CIT(A) erred in deletion of interest disallowance on the advances made to sister concerns u/s 36(1)(iii)(a) of the IT Act. 4. The learned CIT(A) erred in restricting the disallowance to 8% in the instances of advance made to sister concerns as against 12% made by the AO. 5. The learned CIT(A) erred in deletion of addition made towards differential interest on the ground that the assessee's borrowals are at 8% and without affording an opportunity to the AO to verify the claim of the assessee under Rule 46A of the IT Rules. 31. The assessee in its appeal in ITA No. 174/H/13 has raised the following grounds of appeal: "1. The appellant contends that the learned CIT was an error in not deleting completely the disallowance of notional interest calculated on the advances made to the following parties: Name Amount of notional Interest disallowance 1) Agarwal Steel Structures India Pvt. Ltd. 2,32,370 2) AP Agarwal (HUF) 95,906 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 7,21,77,504/- (Loans of Rs. 50,43,29,983 and interest of Rs. 4,62,73,482/- as on 31/03/2008), the same argument does not hold good. Therefore, the disallowance/addition on account of notional interest appears to be in order, but since the rate of interest charged at 12% appears high considering the fact that the assessee had paid interest at 8% on its LC limits which are mostly diverted to sister concerns and also the fact that the AO has not brought on record as to at what rate of interest the appellant borrowed the funds other than the LC amounts, the AO is directed to charge the interest at 8% in respect of the concerns viz., AP Agarwal HUF, APSM Securities Pvt. Ltd., Satish & Co. & Naresh Gupta, and recalculate the disallowance accordingly." 34. Against the said order of the CIT(A), both the revenue and the assessee are in appeal before us. 35. The learned DR argued that the law on the subject of disallowance of interest in respect of amounts diverted to the group companies/related parties is now well settled in favour of the Revenue by the decision of the Hon'ble P&H High Court in the case of CIT Vs. Abhishek Industries Ltd., [2006] 286 ITR 1 (P&H). Further, he sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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