2017 (11) TMI 1923 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Following our decision in assessee s own case for AY 2010-11 2016 (8) TMI 1371 - ITAT JAIPUR the disallowance under section 14A is hereby deleted. Further, given that there is no income that has been earned during the year which has been claimed as exempt from tax, there cannot be any disallowance which exceeds such exempt income as held by M/s Abhishek Inustries Ltd., Ludhiana - 2015 (2) TMI 672 - PUNJAB AND HARYANA HIGH COURT . In Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI following the decision of Holcem India (P.) Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT , has held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. Following the same, the disallowance made under section 14A is deleted - Decided in favour of assessee. TP Adjustment - interest on outstanding receivables from associated enterprises as determined by the TPO in his order u/s 92CA(3) - whether delay in realization of export proceeds beyond stipulated credit period and continuing debit balance in the account of the associated enterprises amounts to an international transaction u/s 92B? - HELD THAT - From perusal of records pertaining to AY 2007-08, 2008-09 and 2009-10, it is observed that the assessee has outstanding receivables beyond 145 days in respect of its export sale transactions with its AEs though the quantum of receivables, period of delayed realization may vary in each of these years. In each of these years, the TPO has also categorized these outstanding receivables as an independent transaction and has proposed a transfer price adjustment towards interest on such outstanding receivables beyond 145 days - at the same time, there is not enough material on record which throw light on the exact reasons for such delay in receivables and hence, in view of the same, it cannot be stated with certainty that there seems to be some pattern in delayed realization of export proceeds beyond stipulated credit period and continuing debit balance in the account of the associated enterprises which intends to benefit the associated enterprises and amounts to an international transaction in terms of explanation to section 92B of the Act. Following the decision of the Coordinate Bench in Rushabh Diamonds 2016 (4) TMI 400 - ITAT MUMBAI and in absence of any contrary higher authority on the subject, we agree with the contention raised by the ld. AR that such amendment by way of an explanation to section 92B is an amendment to a substantive law as it has resulted in enhancement of the scope of international transactions as envisaged u/s 92B - Accordingly, the subject transaction if at all, it has to be considered as an international transaction in light of decision in case of Kusum Healthcare 2017 (4) TMI 1254 - DELHI HIGH COURT which it is not, in the facts of the present case, as we have held above, it has to be considered as an international transaction from AY 2013-14 onwards and for the years under consideration being AY 2007-08, 2008-09 and 2009-10, the same will thus not qualify as an international transaction. CIT(A) has returned a finding that the assessee had adopted uniform policy of not charging interest on delayed realization on sale proceeds from both the AEs and Non AE customers. Regarding average period of realization beyond the credit period in respect of sales made during FY 2006-07 taken by AE s and taken by Non AE s, the ld CIT(A) has returned a finding that the AEs have taken on an average of additional 5 days from the due date, whereas Non AEs have taken on an average of additional 18 days from the due date to make the payments in respect of sales made to them during FY 2006-07 and it is quite evident that both AE s and Non AE s have taken additional days over and above the credit period granted to them and interest have not been charged from any of them irrespective of period of delay. There is nothing which has been brought on record by the Revenue to contest the said findings of the ld CIT(A) and the abovesaid facts and finding of the ld CIT(A) remain uncontroverted before us. In the instant case, we therefore find that there is complete uniformity in the act of the assessee in not charging interest from both the associated enterprises and non-associated enterprises and the average period of realization of the export proceeds is titled more in favor of non-associated enterprises and thus cannot be said to benefit the associated enterprises vis- -vis non-associated enterprises. There is complete uniformity in noncharging of interest on delay in realization of export proceeds and the average period of realization of the export proceeds is titled more in favor of non-associated enterprises, there cannot be any ALP adjustment even applying the CUP method as done by the TPO. Even under the TNMM method which has been applied by the assessee to benchmark its international transaction of export of goods, extending credit period for realization of sale proceeds beyond the prescribed period to the associated enterprise, where the same is considered as an international transaction, is a closely linked transaction with the transaction of export of goods and therefore, the same cannot be treated as an individual and separate transaction which will require an independent benchmarking. The same is in consonance with Rule 10A(d) as well as the concept of aggregation of closely linked transaction supported by the OECD transfer pricing guidelines. It is not the case of the Revenue before us that where such a transaction is aggregated with transaction of extending credit period for realization of sale proceeds beyond the prescribed period to the associated enterprise, it will require any further ALP adjustment than what has been determined by the assessee and accepted by the TPO. In the instant case, the international transaction of export of goods has been duly benchmarked on TNMM basis and the assessee has reported its operating margin of 6.15% as against the comparable updated margin of 6.00% which has been accepted by the TPO and thus not in dispute and thus doesn t require any further ALP adjustment. We confirm the order of the ld CIT(A) in setting aside the order of the TPO and the AO in relation to ALP adjustment in relation to interest on outstanding receivables from the associated enterprises. In the result, ground no. 1 of the Revenue s appeal is dismissed. Disallowance being 10% of the total expenses incurred on various expenses - CIT(A) confirmed 10% disallowances of business promotion expenses and the balance disallowance was deleted - HELD THAT - AR submitted that the said disallowance has been confirmed on estimated basis without pin-pointing any specific defects in the books of account or vouchers maintained by the assessee company and hence, the same may be deleted. On perusal of orders of the lower authorities, we find that the disallowance has been made on a purely adhoc basis and such adhoc disallowance cannot be sustained in the eyes of law. In the result, disallowance of ₹ 64,060/- is hereby deleted. The ground no. 3 of the assessee s appeal is allowed and ground no. 2 of revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under section 14A r.w.r. 8D.
2. Addition on account of interest on outstanding receivables from associated enterprises (AEs).
3. Disallowance of business promotion expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A r.w.r. 8D:
The assessee contested the disallowance of ?6,47,319 under section 14A r.w.r. 8D. The assessee argued that investments were made from internal accruals, not borrowed funds, and no expenditure was incurred. The Tribunal noted that similar disallowances were deleted in previous years (AY 2010-11) due to the availability of sufficient interest-free funds. The Tribunal found no nexus between borrowed funds and investments and cited various High Court decisions supporting the assessee’s stance. It was concluded that disallowance under section 14A was not warranted, and the disallowance was deleted. Additionally, as no exempt income was earned during the year, no disallowance under section 14A could exceed the exempt income.

2. Addition on Account of Interest on Outstanding Receivables from AEs:
The Revenue challenged the deletion of ?1,87,41,073 made on account of interest on outstanding receivables from AEs. The TPO had determined this addition by treating the delayed receivables as akin to loans and applying a 14.05% interest rate. The CIT(A) deleted the addition, noting that the assessee had a uniform policy of not charging interest on delayed payments from both AEs and non-AEs. The Tribunal upheld this deletion, emphasizing that the assessee extended similar credit facilities to non-AEs without charging interest. The Tribunal referred to several judicial precedents, including the Bombay High Court decision in Indo American Jewellery Ltd., which supported the assessee’s practice of not charging interest on delayed receivables. The Tribunal also noted that the amendment to section 92B by the Finance Act 2012 should be treated as prospective and not applicable to the assessment years in question (2007-08 to 2009-10).

3. Disallowance of Business Promotion Expenses:
The assessee contested the disallowance of ?64,060 being 10% of business promotion expenses. The AO had disallowed ?4,76,314 on an estimated basis, which the CIT(A) reduced to ?64,060. The Tribunal found that the disallowance was made on an ad-hoc basis without specific defects in the books or vouchers. Consequently, the Tribunal deleted the disallowance of ?64,060.

Consolidated Findings for AY 2008-09 and 2009-10:
The Tribunal noted that the facts and circumstances for AY 2008-09 and 2009-10 were similar to those of AY 2007-08. Therefore, the findings and directions for AY 2007-08 were applied mutatis mutandis to these years, resulting in similar outcomes for the respective appeals.

Conclusion:
The appeals filed by the assessee were allowed, and the appeals filed by the Revenue were dismissed. The Tribunal's order was pronounced in the open court on 28/11/2017.