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ACIT, Central Circle-29, New Delhi Versus M/s Wave Infratech Pvt Ltd.

2017 (11) TMI 711 - ITAT DELHI

Disallowance u/s 14A - no exempt income earned - Held that:- As no exempt income was earned by the assessee, therefore, considering the decision from Hon’ble jurisdictional High Court in the case of Holcim India Pvt. Ltd. [2014 (9) TMI 434 - DELHI HIGH COURT], Hon’ble Punjab & Haryana High Court in CIT vs Lakhani Marketing [2014 (7) TMI 44 - PUNJAB AND HARYANA HIGH COURT] and CIT vs Shivam Motors [2014 (5) TMI 592 - ALLAHABAD HIGH COURT], we are of the view when no exempt income is earned by the .....

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ial Member) The Revenue is aggrieved by the impugned orders both dated 21/10/2016 of the Ld. First Appellate Authority, New Delhi. In ITA No.6606/Del/2016, the ground raised pertains to deleting the disallowance of ₹ 3,13,08,541/- u/s 14A of the Income Tax Act, 1961(hereinafter the Act) r.w.s 8D of the I.T. Rules 1962 (hereinafter the Rules) has been challenged. 2. During hearing, the crux of argument advanced by Shri Kaushlendra Tiwari, ld. Sr. DR is that CBDT Circular No.5/2014 dated 11/ .....

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607/Del/2016 is concerned, the argument on behalf of the assessee is that the assessee itself made disallowance to the extent of exempt income, therefore, no further disallowance is permissible, for which reliance was placed upon the decision Joint Investments Pvt. Ltd. vs CIT 372 ITR 694 (Del.). In reply, the ld. Sr. DR filed written submission mentioning certain judicial orders, the same is kept on record. 2.2. We have considered the rival submissions and perused the material available on reco .....

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ready reference and analysis:- 2. During hearing, the crux of arguments advanced by Shri Satish R. Mody is that the assessee is in the business of manufacturing of chemical and exports by claiming that the dividend income earned by the assessee is ₹ 3,93,161/-, therefore, the disallowance cannot be more than the dividend income. It was also claimed that there is no direct investment and no disallowance was made in earlier and later years. Plea was also raised that in subsequent year i.e. 2 .....

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material available on record. In the light of the above, before adverting further, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 21/04/2017 for ready reference and analysis:- The assessee is aggrieved by the impugned order dated 29/02/2016 of the First Appellate Authority, Mumbai, confirming the disallowance of ₹ 27,19,404/- made u/s 14A(2) of the Income Tax Act, 1961 (hereinafter the Act) read with Rule-8D of the Rules. 2. During hearing, .....

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n and placed reliance upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. vs DCIT (ITA No.1086 to 1091/Del./2015) order dated 05/05/2016. 2.2. We have considered the rival submissions and perused the material available on record. The ld. DR mainly relied upon the decision from Delhi Bench of the Tribunal in the case of Baba Global Ltd. (Supra), therefore, before coming to any conclusion, we are reproducing hereunder the relevant portion of this order for ready refe .....

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tion 153A of the Income-tax Act, 1961, the only issue is the addition of amount of the notional interest on foreign currency loan advanced by the assessee company to its wholly owned foreign subsidiaries. Whereas for assessment years 2009-10 to 2011-12, besides the above adjustment on account of the notional interest, the issue also is that of addition under Section 14A of the Income Tax Act. 3. The assessee company is engaged in manufacturing of flavoured chewing tobacco, kiwam, scented elaichi .....

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the assessee company has extended loans to its subsidiary companies and held that the assessee ought to have charged interest in respect of such loans and accordingly the TPO recommend that interest as per the Prime Lending Rate of State Bank of India be added as income on account of adjustment of arm s length price. Thereafter the AO passed the draft assessment order making additions as recommended by the TPO. 6. Aggrieved by the order of the TPO, the assessee filed objection before the Disput .....

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sessee. However, it gave a part relief by holding that the interest rate be charged be only base rate and further adjusted by 150 basis point in terms of Safe Harbour Rules. On the issue of addition under Section 14A, the learned DRP confirmed the action of the AO. 8. Aggrieved by the order of the learned DRP and the final assessment order passed by the AO the assessee is in appeal before us. 9. It was contended by the learned AR that the AO was not justified in tinkering with the assessment for .....

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s Kabul Chawla [2016] 380 ITR 573 (Del). 10. On the issue of the merit, it was contended by the learned AR that the additions are untenable as the assessee has paid the advances to its subsidiary companies out of EEFC accounts. The EEFC account even otherwise does not earn any interest. The advances given to the subsidiary companies were in the nature of quasi capital and were for business consideration. The main purpose of giving advances to its subsidiary companies was to promote its export bu .....

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nterest rate has to be that of CHF (LIBOR). In support of its contention the learned AR relied upon the judgment of the Coordinate Bench of the ITAT in the case of Cotton Natural India Pvt. Ltd. vs. DCIT, Circle 3(1), New Delhi 142 ITD (Del) 662 which has also been confirmed by the jurisdictional Delhi High Court. The learned AR also relied upon the following judgments of the ITAT:- (i) Siva Industries & Holdings Limited Vs ACIT (2011) 59 DTR 0182 (ii) Tata Autocomp Systems Limited Vs ACIT ( .....

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learned AR placed reliance on the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Limited vs ACIT, ITA NO. 5816/D/2012 dated 11.03.2014. The learned AR also relied upon the following judgments:- (i) Pan India Network Infravest Private Limited vs ACIT (ITA No. 7026 & 7025 /Mumbai/2013 dated 04.12.2015 (ii) CIT Vs EKL Appliances, ITA No. 1068/2011 and 1070/2011 (iii) Parle Buiscuits P Ltd Vs DCIT (ITA No. 9010/Mum/2010) dated 11.4.2014 ITAT Mumbai (iv) All cargo Logis .....

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(2015) 370 ITR 0338 (Del). 14. It was further submitted that in any case the disallowance under Section 14A cannot exceed the dividend income earned by the assessee company. 15. The learned DR, on the other hand, supported the order passed by the TPO as modified by the learned DRP. It was contended that the order passed by the TPO as well as the learned DRP on the issue of adjustment of interest is a speaking order. It was further contended that once the search has been initiated all the assess .....

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ended that there is no difference between the loan and the share application money and hence interest has to be charged for that year also. 18. On the issue of disallowance under section 14A it was contended that the AO has invoked the provisions of Rule 8D and mere not recording of satisfaction will not make such disallowance untenable in the eye of law. 19. We have considered the rival submissions and perused the order passed by the authorities below. The first issue is addition made by the AO .....

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ration is whether the AO could have made addition in these assessment years without there being any incriminating material and in absence of the abatement of assessment orders already framed. This issue is now squarely covered by the judgment of the jurisdictional Delhi High Court in the case of CIT (Central) - III vs. Kabul Chawla (Supra) wherein the Hon ble High Court has been pleased to hold as under:- 37. On a conspectus of Section 153A(1) of the Act, read with the provisos thereto, and in t .....

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will have to be computed by the AOs as a fresh exercise. iii. The AO will exercise normal assessment powers in respect of the six years previous to the relevant AY in which the search takes place. The AO has the power to assess and reassess the 'total income' of the aforementioned six years in separate assessment orders for each of the six years. In other words there will be only one assessment order in respect of each of the six AYs "in which both the disclosed and the undisclosed .....

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aterial." v. In absence of any incriminating material, the completed assessment can be reiterated and the abated assessment or reassessment can be made. The word 'assess' in Section 153 A is relatable to abated proceedings (i.e. those pending on the date of search) and the word 'reassess' to completed assessment proceedings. vi. Insofar as pending assessments are concerned, the jurisdiction to make the original assessment and the assessment under Section 153A merges into one .....

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disclosed or made known in the course of original assessment. Conclusion 38. The present appeals concern AYs, 2002-03, 2005-06 and 2006- 07.On the date of the search the said assessments already stood completed. Since no incriminating material was unearthed during the search, no additions could have been made to the income already assessed. 39. The question framed by the Court is answered in favour of the Assessee and against the Revenue. The above view has been reiterated by the Hon ble Delhi .....

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ned undisclosed in the relevant assessment years. This Court in Commissioner of Income Tax (Central)-III v. Kabul Chawla: ITA707/2014, decided on 28th August, 2015 has held that completed assessments could only be interfered with by the AO on the basis of an incriminating material unearthed during the course of the search or requisition of the documents. In absence of any incriminating material, the AO does not have any jurisdiction to interfere in concluded assessments. In the present case, as .....

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-08 and 2008-09 are directed to be deleted. Consequently the appeals filed for these assessment years are allowed. 20. As regards assessment years 2009-10 and 2010-11 are concerned the learned DRP has confirmed the addition applying the base rate of State Bank ofIndia plus 150 basis points. It was the contention of the learned AR that no addition can be made as the advance made was out of the EEFC account which carries no interest. Further amount advanced was for promoting its business. On this .....

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ot be the interest rate applicable to Indian Rupees. These advances having been made in the foreign currency, the rate of interest has to be with reference to the interest rate on loans and advances in respect of foreign currency. This issue is covered by the judgment of the jurisdictional Delhi High Court in the case of CIT vs. Cotton Naturals (P) P Ltd. (2015) 276 CTR 0445 (Del) wherein the Hon ble High Court has been pleased to hold as under:- 39. The question whether the interest rate prevai .....

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aid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally a .....

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arkets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender s State or that in the borrower s is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to .....

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s, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no ‗special rela .....

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other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the m .....

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cy are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply. 21. Ac .....

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of interest of the relevant currency in the AY 2009-10 & 2010-11. Accordingly this ground of the assessee is partly allowed for AY 2009-10 & 2010-11.. XXXXXXXXXXXXXXXXX 22. As regards the addition on this account in assessment year 2011-12, the advance given to its subsidiary companies stand converted into share application money. Once the loan has been converted into share application money, for the issue of the share capital, then such amount cannot be considered as loan. The TPO is n .....

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and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in th .....

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s directed to verify the date of conversion of loan to share application money and not to make any adjustment on account of interest post conversion of loan to share application money and accordingly this ground of the assessee is allowed for statistical purpose. 23. As regards the disallowance under section 14A in respect of the expenditure incurred for earning exempt income is concerned, we note that the assessee has earned the following income in the assessment years 2009-10 to 2011-12:- XXXX .....

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Rule 8D. Having done so, it cannot be said that the AO has not taken into consideration the explanation of the assessee. 26. However, as regards the second contention of the learned AR that the disallowance cannot exceed the exempt income, we are in agreement with this contention. This view is supported by the judgment of the Hon ble jurisdictional Delhi High Court in the case of Joint Investments Pvt. Ltd. versus Commissioner of Income Tax [2015] 372 ITR 694 (Del). Accordingly we direct the AO .....

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the present appeal, the issue relates to disallowance of ₹ 27,19,404/- made u/s 14A(2) of the Act read with Rule-8D of the Rules. Considering the totality of facts, we are of the view that at best, if any disallowance could be made that cannot exceed the exempt income. The Tribunal in the case of Nimbus Communication Ltd. (supra) has made an elaborate discussion and thereafter reached to a particular conclusion, thus, the ratio laid down in the cases mentioned by the ld. Counsel for the a .....

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. Finally, the appeal of the assessee is allowed. 2.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, conclusion drawn in the aforesaid order of the Tribunal dated 21/04/2017, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we note that the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 194 taxman 203 ha .....

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