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TMI Blog2014 (2) TMI 1229X X X X Extracts X X X X X X X X Extracts X X X X ..... ,99,356/- without granting the benefit of volume, risk adjustments and other qualitative factors. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in granting only a partial relief of Rs. 22,01,826/- and partially upholding the adjustment of Rs. 877,651/- made by TPO/AO on account of notional interest income on alleged delay in collection of invoices. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the disallowance made by the Assessing Officer of an amount of Rs. 11,24,917/- under the provisions of Section 14A. Grounds of Revenue's appeal: 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not considering the fact that the assessee was allowing its AE to make the delayed realization of debts in spite of utilizing huge borrowed funds for its business operations. 2. Whether on the facts and circumstances of the case and in law, the [ld. CIT(A) erred in not considering the fact that charging the arms length interest at 6 months LIBOR +150 basis points will be incongruous, as the assessee itself has availed borrowed funds with huge rate of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There can be an internal CUP, when one of the group entities enters into a comparable transaction with an unrelated party where the goods or services under consideration are same or similar. There can be external CUP also, if a transaction between two independent enterprises involves goods or services under comparable conditions. As pointed out by the Ld. Counsel, in diamond industry/business within the same product of diamond, there is a huge dissimilarity and variation of features which leads to difference in the prices. The pricing of the diamonds depends upon various parameters/factors like size of the diamond , carat weight, various types of shape, colour florescence, clarity grade, polishing, height and depth angle, girdle thickness etc., which leads to differential pricing of the diamonds. In such a condition it becomes very difficult to apply CUP method in bench marking the pricing of the diamond. On this proposition we fully agree with the contention of the Ld. Counsel that CUP method is generally not a very suitable method for bench marking the pricing of the diamonds and price paid in comparable uncontrolled purchase or sales. It is not a very easy proposition to hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught anything on the record that AEs were eligible for discount, based on quantity sold and these differences are not material difference. We are of the opinion that such a reasoning given by the Ld. CIT(A) cannot be upheld, because these factors do have affect in the negotiation of price. The difference on account of factors affecting the prices have to be given adjustment with the comparables. Since, in a CUP method a very high degree of comparison of business conditions, products and other physical attributes of the products and services are to be examined, therefore, more often it becomes very difficult to have such comparable transactions. The rule 10B. provides that in such a situation, adjustment on account of differences can be made if it materially affects the price in the open market. The negotiation of a price depends upon various factors like volume of sales/transaction, contractual terms of the parties, geographical market conditions in which transaction takes place, time and period of transaction and various other risk factors like bad debt risk, foreign currency risk etc. All these factors have to be taken into account for the determination of a price in a given tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd circumstances of the case, appropriate relief should be given to the assessee. Ld. AR submitted that as the difference in Arm's Length Price itself is less than 11%, therefore, no further adjustment will be required to be made. For completeness of facts Ld. AR referred to the following two tables from the order TPO which read as under: "After considering the objections raised by the taxpayer, the arm's length price charged by the taxpayer , the arm's length price of diamonds of variety "6D CUT WHITE VVS 1' is determined as under using the price charged by the taxpayer in its non-AE transactions under CUP method. Sl.No. Date of Invoice No. of Carats Rate per Carat charged (USD) CUP Rate per Carat (USD) Adjustment for Marketing @ 0.17% (USD) Adjusted CUP rate per Carat (USD) 1 28/11/2007 31.60 850.00 911.00 1.55 909.45 2 02/01/2008 14.43 850.00 911.00 1.55 909.45 3 31/03/2008 18.11 850.00 911.00 1.55 909.45 4 31/03/2008 10.56 800.00 911.00 1.55 909.45 Arm's Length Price: Sl.No. Date of Invoice No. Carats Rate per Carat charged (USD) Adjusted CUP rate per Carat (USD) Difference (USD) Adjustment (USD) 1 28/11/2007 31.60 850.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs LIBOR + 150 basis point for such delayed receipt of payment from AE. Accordingly, the addition of Rs. 22,01,826/- was deleted and sustained to the extent of Rs. 8,77,651/-. In ground No.3, the assessee is agitating the sustained addition of Rs. 8,77,651/- and Revenue in its appeal is agitating the deletion of Rs. 22,01,826/-. 7.2 At the outset it was submitted by Ld. AR that this issue was also the subject of consideration before the Tribunal in respect of A.Y.2007-08 and adjustment on this account was deleted with the following observations: 12. We have carefully considered the rival submissions and also perused the relevant finding of the TPO as well as the CIT(A) and also the material on record. It is an undisputed fact that the assessee has not charged any interest from the third party in respect of delayed payments even when the time period of realization has exceeded more than 300 to 400 days. From the perusal of the details as submitted by the learned counsel in the paper book, it is seen that there are many instances in which more than 200 .days have been exceeded in realization of payments in case of third parties. Once on such delayed payments with third party no int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s follows: "(i) Direct Expenditure : Nil (ii) Interest X Average Investment giving rise to tax free income Average total Assets 95,24,981X (175,00,000+ 185,00,000)/2 (176,21,81,878 + 156,06,73,278)/2 : Rs. 10,34,917/- (iii) 0.5% of the Average investment Of 180,00,000/- : Rs. 90,000/- Total : Rs. 11,24,917/- Accordingly, Rs. 11,24,917/- u/s.14A of the IT Act, 1961 is disallowed from business expenses." 8.1 At the outset it was submitted by Ld. AR that so far as it relates to 0.5% of the average investment i.e. a sum of Rs. 90,000/- the assessee does not have any grievance and addition to that extent may be sustained. However, Ld. AR submitted that so far as it relates to other components of Rs. 10,34,917/- the addition is not warranted as the assessee has its own sufficient funds out of which investment was made from where the assessee has earned tax free income. To substantiate such contention Ld. AR has invited our attention to the following tables described at page 26 of the impugned order of Ld. CIT(A). Particulars Year ending March 31,2008 Year ending March 31, 2007 Partners' Capital Account balance 16,77,,16,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011 for A.Y. 2008-09 order dated 22.03.2013.
(3) Alchemic Financial Services Ltd. v. Addl. CIT, ITA No.6349/Mum/2011 for A.Y 2008-09 order dated 10/08/2012.
(4) DCIT vs. Jay Chemical Industries Ltd. , ITA No.729/Ahd/2011 for A.Y. 2008-09 dated 05/10/2012.
8.4 On the other hand, Ld. DR relied upon the order passed by AO and Ld. CIT(A).
8.5 We have heard both the parties and their contentions have carefully been considered. The arguments taken by Ld. AR are supported by the aforementioned decisions of the Tribunal. It has been shown that assessee has its own sufficient funds which are sufficient to cover the investment from where the assessee has earned tax free income. Moreover, on the major portion of the interest the AO has accepted the submissions of the assessee in subsequent year, therefore, we are of the opinion that addition on interest component is not called for. We confirm the addition to the extent of Rs. 90,000/- and delete the addition of Rs. 10,34,917/-. This ground is partly allowed.
9. In the result, the appeal filed by the assessee is partly allowed and the appeal filed by the revenue id dismissed.
Order pronounced in the open court on 04/02/2014 X X X X Extracts X X X X X X X X Extracts X X X X
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