TMI Blog2019 (5) TMI 1837X X X X Extracts X X X X X X X X Extracts X X X X ..... AO/TPO to recalculate interest receivables on share application money forwarded to AE by applying LIBOR plus 300 BPS. Transfer pricing adjustment on outstanding export receivables - TPO has made an adjustment on all export invoice where export realization was beyond the period of 85 days by applying interest @ 4.5% being 200 BPS mark up on the interest taken on packing credit as availed on 2.5% by the assessee - HELD THAT:- There is no dispute with regard to the fact that the assessee has not charged any interest on receivables from both AE as well as Non-AE. Further, where there is complete uniformity in act of assessee in not charging interest from both AE and Non-AE debtors for delay in relation of export proceeds, therefore, the AO is not justified in making addition of notional interest to the assessee ALP on aforesaid ground in course of transfer pricing adjustment. As weighted average realization in case of AE was lesser than Non-AE, no TP adjustment should be made. This finding is fortified by the decision of Indo American Jewellery Ltd. [ 2013 (1) TMI 804 - BOMBAY HIGH COURT ] where it was held that there was complete uniformity in act of assessee in not charging in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order. 2. The assessee has filed following grounds of appeal:- 1.0 Ground No. 1 The Hon'ble Commissioner of Income Tax (Appeals)-1 5,Mumbai [The CIT (A)] has erred in law and on facts and in circumstances of the case in upholding addition of ₹ 29,66,742 in respect of share application money advanced to Associate Enterprise ('AE'). 2.0 Ground No. 2 The Hon'ble CIT(A) has erred in law and on facts and in circumstances of the case in upholding the addition of interest of ₹ 9,53,074 on delay in realization of export receivables from AEs. 3.0 Ground No.3 The Hon'ble CIT(A) has erred in law and facts in upholding the additional disallowance of ₹ 74,44,433; one-half per-cent of the average value of investments under section 14A of the Income Tax Act, 1961 {'the Act'} by applying Rule 8D of the Income tax Rules, 1962 ('the Rules). 4.0 Ground No.4 The Hon'ble CIT (A) has erred in law and on facts and in circumstances of the case in upholding the additional disallowance of ₹ 74,44,43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay in receivables from export sales. In response, the assessee submitted that credit period in case of export and local sales differs from customers to customers on the terms and conditions of which the goods are sold. The credit period is also depends upon the credibility of the customers. Commercial rational behind non-charging of interest is industrial practice considered for determining ALP. 5. The TPO after considering the relevant submissions held that LIBOR plus mark up approach adopted by the assessee to charge interest on share application money to its AEs is not acceptable, because adding mark up to the LIBOR covers the risk reward only when the transaction is made in forex. When money is advanced to the AE by buying hard currencies from selling INR, there is additional risk of exchange rate difference. The assessee has not covered itself against currency risk, entity risk, country risk and administrative cost in charging LIBOR plus 200 BPS to the AE. A mark up of 300 BPS is therefore applied to the rate of interest charged by the assessee. Accordingly workout interest receivables on share application money and determined total interest of ₹ 81,58,533/- and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade towards interest receivables on export receivables. The assessee has also challenged the additions made by the AO towards disallowance of expenses incurred in relation to exempt income. The ld CIT(A) after considering relevant submissions of the assessee, partly allowed appeal filed by the assessee, where he has confirmed additions made by the AO towards transfer pricing adjustment on account of interest charged onn share application money and also transfer pricing adjustment in respect of outstanding export receivables but, allowed partial relief in respect of additions made towards disallowance of expenditure incurred in relation to exempt income u/s 14A by directing the AO to consider only net interest expenditure for the purpose of disallowance under Rule-8D-2(ii) of the Rules, 1962. 8. Aggrieved by the order of the Ld. CIT((A), the assessee as well as the Revenue is in appeal before us. 9. The first issue that came up for our consideration from ground no.1 of the assessee s appeal is transfer pricing adjustment on account of interest charged on share application money forwarded to AE for ₹ 28,66,742/-. 10. The facts with regard to impugned dispute are that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Del.) and also the decision of Hon ble Bombay High Court in the case of CIT vs Tech Mahindra Ltd. (2015) 229 taxman 298 (Bom.). The assessee has also relied upon the decision of Hon ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. vs UOI (2006) 282 ITR 273 (SC). 12. The Ld. DR on the other hand, submitted that although the assessee has bench marked interest charged on share application money forwarded to AE by taking LIBOR plus 200 BPS, but failed to offer any explanation why it has deviated from earlier year rate of LIBOR plus 300 BPS charged on share application money given to AE. Though, the assessee has advocating principle of consistency, but assessee itself did not follow consistency in charging interest on share application money which is evident from the fact that the assessee has charged LIBOR plus 300 BPS in earlier year, whereas changed rate of interest to LIBOR plus 200 BPS for the year under consideration without there being any change in facts. Therefore, there is no error in the adjustment made by the TPO/AO in respect of international transactions and hence the additions made by the AO should be sustained. 13. We have heard both parties, perused the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and non-AE. The assessee has not charged interest on outstanding receivables to both AE and non-AE customers. To support its arguments, the assessee has furnished a letter from Gem Jewellery council to establish that non charging of interest on receivables was an industry practice. The TPO asked the assessee to provide weighted average period for receivables form both AE and Non AE. The assessee submitted that weighted average days for receivable from Non AE were 85 days and that from AE was 39 days. The TPO has made an adjustment on all export invoice where export realization was beyond the period of 85 days by applying interest @ 4.5% being 200 BPS mark up on the interest taken on packing credit as availed on 2.5% by the assessee. The Ld. CIT(A) affirmed the additions made by the AO on the ground that there was no complete uniformity between credit period to AE and Non AE and hence transaction was not at arm s length. The Ld. CIT(A) also held that weighted average as computed by the assessee for establishing 39 day credit period to AE included the advances received by it and hence rejected the comparison. 15. The Ld. AR for the assessee submitted that where there is a compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bombay High Court in the case of CIT vs vs Indo American Jewellery Ltd. [2014] 223 taxman 8 (Bom.), where it was held that there was complete uniformity in act of assessee in not charging interest from both AE and Non-AE debtors for delay in realization of export proceeds, no adjustment to ALP in course of transfer pricing proceedings. Therefore, we are of the considered view that the AO/TPO was erred in making addition towards notional interest receivables on export receivables and hence direct the AO to delete the additions made towards interest on export receivables. 18. The next issue that came up for our consideration from ground no.3 is disallowance of expenditure incurred in relation to exempt income. The facts with regard to the impugned dispute are that during the year under consideration, the assessee has earned exempt income being dividend of ₹ 3,62,07,763/-, which was claimed exempt u/s 10(34) of the Act. The assessee has also made Suo-moto disallowance of ₹ 50,02,065/- towards expenditure incurred in relation to exempt income. The AO has determined disallowances contemplated u/s 14A by applying the principles provided under Rule-8D(2) and determined to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be upheld. 21. We have heard both parties, perused material available on record and gone through the orders of authorities below. Both the parties never disputed applicability of provision of section 14A r.w.r.8D(2). In fact, the assessee has computed suo-moto disallowance of₹ 50, 02,065/- in respect of expenditure incurred in relation to exempt income. The AO rejected suo-moto disallowance computed by the assessee and invoked Rule-8D(2) to determine disallowance of expenses. The assessee challenged the action of the AO in light of provisions of sub-section (2) of section 14A to argue that there is no clear cut satisfaction from the AO before invoking provisions of Rules8D(2) which is mandatorily required to be recorded before computing disallowance by applying prescribed procedure under Rules-8D(2). We find that an identical issue has been considered by the co-ordinate Bench in assessee s own case for AY 2008-09 and 2009-10, where under identical facts and circumstances, the Tribunal deleted additions made by the AO towards further disallowances over and above suo-moto disallowances made by the assessee towards expenditure incurred in relation to exempt income on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrency loans. The assessee contended that the bank provides these credit facilities for export and import business and used for a particular export and import. The bank does not provide fund for making investment in shares etc. As such the amount borrowed from the banks cannot be utilized by the assessee for any other purposes. Since, there is end use restriction from the bank, it was contended that the assessee-company has utilized whole interest bearing fund of ₹ 187.40 crores towards business investment for business purposes not for investment in shares. Thus contended that assessee-company has not borrowed any money for investment in shares of other company for earning dividend income. 13. Assessee further contended that since it had incurred certain DEMAT charges/expenses, those expenses may directly attributable to exempt income. Thus, the company has disallowed ₹ 10,45,5677and ₹ 55,62,9707- u/s.!4A of the Act in the computation of income for the assessment year 2008-09 and 2009-10 respectively, and therefore, the disallowance may be restricted to this count. However, the Assessing Officer not appreciating the submission of the assessee invoking the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee,. is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the asses- see in respect of such expenditure. Sub-section (3) is nothing but an offshoot of subsection (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance -u/s.14A is warranted in the facts and circumstances of the assessee's case. Thus, we direct the Assessing Officer to delete the disallowance made u/s.14A of the Act. ' 22. In this view of the matter and consistent with view taken by the Co-ordinate Bench, we direct the AO to delete further disallowance made towards expenditure incurred in relation to exempt income u/s 14A of the Act. 23. The next issue that came up for our consideration from ground no.4 is computation of book profit u/s 115 JB of the Act, by making adjustment towards disallowance of expenditure incurred in relation to exempt income. 24. The Ld. AR for the assessee, at the time of hearing submitted that this issue is covered in favour of the assessee by the decision of the ITAT, Delhi Special Bench in the case of ACIT vs Vireet Investment P. Ltd. [2017] 82 taxmann.com 415 (Del. Trib.)(SB), where the Tribunal held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without restoring to computation as contemplated under section 14A r.w.r. 8D. 25. Having heard both sides and considered material available on record, we find that issue is also squarely co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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